Over the last decade, a big argument for buying stocks was the fact that interest rates were at rock bottom, leaving investors with few alternatives.
But now the argument for stocks is “there is no alternative” or TINA.
That’s because cash yields — or risk-free yields on short-dated Treasuries — are rising sharply as the Federal Reserve continues to raise interest rates, Bank of America’s Savita Subramanian said in a note Friday.
The Fed has raised interest rates by 225 basis points so far this year and is expected to raise rates by another 75 basis points next week. Overall, investors currently expect the federal funds rate to be above 4% by the end of the year, according to the CME FedWatch Tool.
While some have argued that the Fed needs to hold off on raising interest rates because of underlying damage to the economy, Subramanian suggests that history shows the Fed is better off being overly cautious about rising inflation over the long term.
“Lessons from the 1970s tell us that early easing could lead to a new wave of inflation and that market volatility in the short term can be a lower price,” Subramanian said.
With everything from stocks to bonds to cryptocurrencies to gold falling sharply this year, Subramanian’s argument may resonate with many investors, especially given that uncertainty has soared amid Russia’s war on Ukraine, rising oil prices and a depressed consumer sentiment.
“The 4% cash yield provides a real alternative to equities and justifies the lower multiples vs [the] last decade with TINA,” Subramanian said. A 4% risk-free rate of return on short-term T-bills doesn’t sound terrible when the S&P 500 is down nearly 20% year-to-date.
And with inflation hovering around 8%, the S&P 500 could continue to decline because its 16.7 times forward price-to-earnings multiple is “too high,” Subramanian said. “Stocks are cheaper, but still not cheap.”
Subramanian estimates that there is only a 20% chance that the stock market has fully priced in an economic recession. “We remain bearish,” Subramanian said.