Wall Street: Stocks v. Bonds

Stocks vs. Bonds To the relief of practically everyone, the stock market settled down to something resembling normality last week—that is, after another Monday break opening in which the Dow-Jones industrial index tumbled 17.37 points to 593.68.

Thereafter, encouraged by Administration proclamations of impending tax relief, the market slowly recovered to close the week at 601.61—less than 10 points off the previous week's close. By week's end, the trading on the Big Board slowed to a leisurely 2,500,000 shares a day, and brokers and clerks caught up on their rest and their reading.

The Bargain Hunters. With a lot of money waiting on the sidelines until the market's direction became clearer, most of last week's activity was the work of bargain hunters. For them, brokerage houses churned out new lists of stocks that offer reasonable income and low price-earnings ratios. One such list, circulated by Manhattan's Schweickart & Co., ticked off half a dozen blue chips—including Allied Stores. General Motors, Jones & Laughlin and Royal Dutch Petroleum—with price-earnings ratios of less than 12 to 1 and dividend yields of 4% or more. For many stocks, yields were on the rise—and not only because stock prices had fallen so much. Last month 89 U.S. companies increased their dividends; in May of last year, only 50 did.

The new emphasis on yields drew fresh attention to the stock market's sedate sister, the bond market. Traditionally, stocks and bonds move in opposite directions. When stock prices fall, a substantial quantity of investment money generally switches out of speculative stocks and into fixed-income bonds. But this switch also sets the stage for a movement back into stocks for two reasons: 1) bond interest yields fall as demand for bonds rises, and 2) stock yields rise as the prices of stocks decline.

No Crossing. That movement is going on now. The average dividend yield on the 30 stocks in the Dow-Jones industrial average has risen from 3.19% in early January to 3.87%. During the same period, the average yield on ten top-grade bonds in the Barren's index slipped from 4.41% to 4.19% because demand increased as some of the big institutional investors switched out of stocks and into bonds. If this narrowing between yields continues, stocks should become more appealing to investors.

Many market professionals expect that the gap will narrow a bit more, but few anticipate that stocks will yield more than bonds in the foreseeable future. The often-expressed notion that stocks should pay more income than bonds because they are riskier is scouted by New York University Economist Jules Bogen. Says he: "Stock yields should average lower than bond yields in the long run because only stocks offer the benefits of growth. The lines of stock and bond yields will cross only if the outlook for the economy becomes a lot darker than it is now and investors become afraid of assuming risks."