While the equity market continues to hold most of its recent well-deserved rally — based on real and expected improvements in corporate earnings and better GDP growth in the second half of 2003 — the bond market is experiencing a double whammy of selling pressure.
While I and others believed the Treasury market and selective-spread fixed-income securities were overpriced in the May/June period, lately that selling has turned into a rout. Too bad we have not learned how to treat investors who wisely did not buy in that time period (bond flows peaked in 2002 and the first quarter of 2003), but who nevertheless purchased fixed-income securities in previous months and years for their secure income.
When I hear on the news that bond investors have lost 10 percent of their securities value since mid-June, I become even more concerned about how Americans are being taught to save and invest in their future. The 10 percent figure being thrown about is only the price change on specific longer-dated fixed-income securities from mid-June to late July. It does not take into account the income return, therefore it is not a true total-return calculation.
Many investors are being misled by the recent rhetoric versus the fixed income securities they may own — ie., the type, maturity, and book yield on their investments. These scare tactics are being taken to heart by investors, especially the elderly.
It is interesting to note the total returns (income plus price change) of different fixed-income securities for the past month (as of July 21). While all Treasury securities experienced a -3.3 percent total return, 2-year Treasuries were -0.6 percent, 5-year Treasuries -3.0 percent, and 10-year Treasuries -5.9 percent. Corporate bonds experienced a -3.2 percent total return while high-yield bonds, due to their high coupons, experienced a 0.0 percent total return. By the way, the S&P 500 total return was -0.9 percent during this same time period.
We all know that the financial industry makes more money — or fees — on stocks than on bonds. But now that we have seen a number of corporations increase their dividend rate on their common stocks to be more competitive with fixed-income securities — and I sure applaud that trend — wouldn’t they want the media and the brokerage community to display the total return on their stocks and not just the price movement? You bet!
Let’s be fair. Common stocks and fixed-income securities should be treated as two prongs of the same fork. They both enhance and maximize a corporation’s balance sheet and future if wisely used; they both enhance and maximize an investors risk-adjusted investment return if wisely used.
Price appreciation and depreciation comes and goes (hopefully with an upward bias similar to the rate of sustainable earnings), but income — whether from a coupon return or from dividends — is a real return actually received. It can be saved (reinvested back into securities) or spent.
Members of the investor class should never let outsiders with vested interests deter them from a balanced and more sustainable approach to investment returns. Let’s cut out the hype on specific asset classes. Each asset class out there is probably overrated, but they are all essential to the long-term financial health of the economy.
— Patricia A. Small is a partner with KCM Investment Advisors [visit their new site], and is the former Treasurer, University of California.