For the first time in 40 years, the returns on U.S. "stocks, bonds, and cash" are almost similar

Recently, an article titled "How to Invest When Everything Yields the Same" published in The Wall Street Journal pointed out the phenomenon of "yield convergence" in the current U.S. market.

The article noted that the yields on U.S. Treasury bonds, stocks, cash, and corporate bonds are currently converging, a situation that has been extremely rare in the past 40 years. This means that either the returns on risk assets are below normal levels, or safe assets are not as safe as they seem, or both.

The analysis in the article suggests that there are two main reasons for this phenomenon: inflation and corporate profits.

On one hand, the Federal Reserve's response to the surge in inflation in 2022 has brought cash and Treasury yields back to "normal" levels seen before 2008; on the other hand, the high valuations and profit margins of the S&P 500 have depressed stock return yields, while strong corporate balance sheets have reduced the additional yield demand for corporate bonds.

This phenomenon of yield convergence presents investors with an unprecedented dilemma: should they lock their funds in long-term Treasury bonds or choose similarly yielding money market funds? Should they continue to hold overvalued U.S. stocks or take the risk of investing in other markets?

A New Balance in U.S. Asset Prices

According to the statistical data in the article, the gap between the highest and lowest yields among major U.S. asset classes is the smallest it has been in the past 40 years. The stock return yield (the ratio of earnings to price, currently 4.7% for the S&P 500) is nearly on par with the 10-year Treasury yield (4.4%).

This means that stocks are providing almost no so-called "margin of safety," and investors' confidence in the high valuations of stocks is entirely based on future profit growth expectations—Wall Street even predicts that the S&P 500's profit growth will exceed 13% over the next two years, nearly double the long-term average, far exceeding this year's projected growth rate of 9%.

This could mean that if profit growth does not meet expectations, the high valuations of stocks will become a significant risk point.

Additionally, in recent years, the term premium on 10-year Treasury bonds has rapidly risen to its highest level since 2014. This reflects market volatility and indicates that investors' concerns about inflation or default risk have increased.

The article pointed out that in recent years, the U.S. federal deficit has remained high, and even with decent economic performance, government borrowing needs have not diminished. This situation has led some investors to begin questioning the "risk-free" label of Treasury bonds.

Fleeing U.S. Assets?

Faced with the convergence of U.S. asset yields, many investors have turned to overseas markets, forming the so-called "Abusa trade" (Anywhere But U.S.A.). The article cites the "great convergence" theory proposed by Luca Paolini, Chief Strategist at Swiss asset management company Pictet, stating that the growth of the United States, China, Europe, and Japan is experiencing a "huge fusion." It suggests that investors should avoid expensive U.S. stocks and the dollar, and instead look for investment opportunities in Europe and Japan.

Looking ahead, the article predicts that U.S. Treasuries will still have value as a "ballast" in investment portfolios. The United States has all the major tech giants, which remain cash-rich, and the U.S. economic growth rate is likely to continue to significantly exceed that of other regions.

In conclusion, the article summarizes that investors need to consider whether to buy the best-performing U.S. assets that may be becoming less favorable, or to purchase weaker but improving non-U.S. assets?