Cash is king!?

When a $6 dollar plastic crown can fetch almost $600,000 at auction, it’s safe to say the value has been inflated.

The harder question for investors nearly a year into the Federal Reserve’s inflation fight is whether buying the dip in stocks is wise, or earning a cool 5% yield on safe-haven Treasury bills, a cash-like equivalent, makes more sense.

By one popular metric, investing in the stock market now yields roughly the same as short-term debt backed by the full faith of the U.S. government, albeit with both still outpaced by the 6.4% annual cost of living as of January.

Specifically, the earnings yield of the companies in the S&P 500 index

converged in the past week with the 6-month Treasury

rate, with both meeting around 5%, for the first time in about 20 years (see chart).

U.S. stock market earnings yield and 6-month Treasury rate converge in early 2023 around 5%


The earnings yield looks at the past 12 months of earnings, divided by share price. It also is a gauge of which assets are overpriced or underpriced.

“I think what you make of it is bonds are back,” said Kathy Jones, chief fixed-income strategist at Schwab Center for Financial Research, noting the two yields used to track more closely for many years in the 1980s and ’90s. “It’s probably new for a lot of investment managers and individual investors.”

Schwab’s house view on equities has been cautious for awhile, including that higher-growth stocks could be vulnerable to further pullbacks as the Fed continues to tightening financial conditions.

Jones said the chance to earn 5% with bonds looks “very attractive, and probably allows an investor to ride out more ups and downs in the equity portion of their portfolio, and not by taking as much risk.”

Fund flows into bonds

Investors appear to be liking today’s higher bond yields, with roughly $17 billion flowing out of U.S. equity funds this year through Feb. 15 and $4.2 billion flowing into Treasury bond funds, the strongest inflows to U.S government debt funds to start a year since 2004, according to BofA Global data.

“Why not take 4.8% or 5% on a yield basis that’s risk-free,” said Stephen Guilfoyle, founder and president of Sarge986, a private family trading operation, and a former NYSE floor trader. “I’m moving some of my cash to 3-month paper and I’m really an equities guy.”

The 3-month Treasury rate

was near 4.8% on Friday, while the 2-year Treasury

was at 4.6% and the 10-year yield

was around 3.8%, its second highest level of the year, according to Dow Jones Market Data.

U.S. stocks ended the week mostly lower after the consumer-price index showed inflation might need higher interest rates to recede more quickly. Economists at Goldman Sachs and Bank of America revised their forecasts to include interest rate increases of 25 basis-point hikes in March, May and June, which would bring the Fed’s terminal rate to a 5.25% to 5.5% range.

In January, investors who trade in fed-funds futures market were expecting the Fed to stop raising rates at 5%.

Major equity indexes still were up in 2023, driven by hopes that a deep recession can be avoided and the Fed also might scale back the size of its interest rate hikes.

Josh Duitz, deputy head of global equities at abrdn, said equity prices currently reflect a “Goldilocks scenario” where the Fed tames inflation but the economy experiences a shallow recession.

But he also thinks equity “valations got out of hand” in the past 10 to 15 years of low interest rates, especially for growth stocks. Duitz thinks investors should brace for higher rates for longer. “When the cost of capital is higher, those growth names aren’t as attractive,” he said. “Look at the cash companies are producing and paying out to individual shareholders.”

While off earlier highs in 2023, the S&P 500 was up 6.2% on the year through Friday, the Dow Jones Industrial Average

gained 2.1% higher and the Nasdaq Composite Index

advanced 12.6%, according to FactSet.

Where do markets go from here? Who knows. Not everyone saw the value in the Notorious B.I.G. wearing a cheap crown to a 1997 photoshoot, even through, as Rolling Stone magazine points out, it ended up being “one of the most famous hip-hop portraits ever taken.”

Read: ‘The risk is that we’re going to hit the brakes very, very hard,’ Larry Summers says

On deck for next week, the U.S. stock market will be closed Monday for Washington’s birthday. Data on existing homes sales for January are due Tuesday, while Fed minutes of the February 1 rate-setting meeting are due Wednesday. But the big data point likely will be Thursday’s PCE index for January with a new inflation reading.

—Joseph Adinolfi contributed reporting to this article


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