Why a Chief Stock Strategist Likes Bonds

Klotz on Bonds

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<h3>James A. Klotz</h3>

James A. Klotz

What is a top equity strategist recommending for individual investors?

“It’s basically bonds,” said Michael Wilson, Morgan Stanley’s head of U.S. equities.

Wilson, who called the S&P plunge in 2022 and the bear-market rally later in the year, told Bloomberg weeks ago the index may bottom out at 3,000 to 3,300. Since then, the S&P has gone mostly sideways.

Chief stock strategist likes bonds

“If you think about bear markets that are punctuated by either an economic or earnings recession, we think we will get at least one of those, the earnings recession.”

In such a market, he said, traders might want to be more speculative.

But “for the investment community and for asset owners,” he likes bonds.

He’s got company.

Positives from professionals

Coming off of 2022, when mutual funds exited the municipal bond market, many experts now see a reversal.

One recent headlined blared, “Municipal bonds positioned to shine in 2023.” Another said, “2023 should be better for municipal bonds, experts say.” Yet another proclaimed, “Patience and caution – watchwords for a bounce back 2023.”

“Market participants tend to believe a huge down year will be followed by a strong up year (known as a reversion to the mean) – and history suggests this is usually true,” proclaimed BlackRock.

Of course, investors in individual issues look at the market differently.

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    Certainly, they fretted over the drop in the market value of their bonds last year, but they understood what was happening: Fear trumped dispassionate analysis. The quality of issues didn’t change, the headlines did – a sure signal there was value to be had.

    As a result, they have been aggressively adding to their holdings, taking advantage of yields not seen in years.

    Consider the muni-Treasury ratio, a benchmark for assessing the relative attractiveness of municipal bonds. Recently, the tax-equivalent yield ratio for 30-year, AAA-rated munis to Treasuries was a juicy 150% for investors paying the 40.8% tax rate.

    How muni investors sleep soundly

    Investors understand that closely examining the quality of the bonds they want to purchase has always been the key to success in the municipal bond market.

    They know that more than 90% of Moody’s-rated bonds are rated A or higher, and the median rating is Aa3, important facts if economic conditions change.

    Finally, they appreciate that more than 99.9% of the time, municipal bonds pay on time and in full.

    Given the track record of municipal bonds and their reliability in generating a steady stream of tax-free income, it’s not terribly surprising, after all, that equity professionals are jumping on the muni bandwagon.

    James A. Klotz is the President of FMSbonds, Inc.
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    Feb 9, 2023

    Please note that all investing entails risk. Fixed income securities are subject to risks that will affect their value prior to maturity. Some of these risks can be related to changes in market conditions, issuer creditworthiness, and interest rates. This commentary is not a recommendation to buy or sell a specific security. All references to tax-free income refer to U.S. federal income tax. Income earned by certain investors may be subject to the Alternative Minimum Tax (AMT), and or taxation by state and local authorities. Please consult with your tax professional prior to investing. For more information on these topics please click on the “Bond Basics” link below or search by keyword at the top of this page.