Goldman Sachs: Stocks Will Greatly Outperform Bonds in Coming Years

Wednesday, 06 Aug 2014 07:31 AM

By Dan Weil

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Much of the bond market has outperformed stocks so far this year, but that's not going to last for the long term, as interest rates rebound from historic lows, according to Goldman Sachs analysts.

"We forecast a dramatic divergence between stock and bond returns during the next several years," Goldman's chief U.S. equity strategist David Kostin and others wrote in a commentary obtained by CNBC.

The analysts predict the S&P 500 stock index will return 6.2 percent a year uncompounded between now and 2018, as the federal funds rate rises to 4 percent from zero to 0.25 percent currently.

Editor’s Note:
5 Shocking Reasons the Dow Will Hit 60,000


During the same period, Goldman sees only a 1 percent return for the 10-year Treasury note. It predicts the 10-year yield will rise to 4.5 percent from 2.52 percent Tuesday. It was at 2.44 percent early Wednesday.

So far this year, the S&P 500 has returned 4.9 percent, compared to 8.5 percent for the Barclays U.S. 10-to-20-year Treasury index.

"On a sector level, cyclical equities tend to outperform the index during the lead up to rate hikes, although there are few discernible patterns in the months following rate hikes," Kostin said.

"Information technology has outperformed on average, although these results are skewed by the dot-com bubble coinciding with the interest rate hikes of 1999. Excluding information technology, the S&P 500 still averaged a strong 11.7 percent return during the year prior to a rate hike, while the median stock returned 13.1 percent."

Economic growth of 3 percent or more will push interest rates higher, according to the analysts. They expect consumer prices to rise 2 percent annually, not far from the current rate of 2.1 percent.

As for the short term, conventional wisdom has it that August is a weak month for stocks. But that's just a myth, says Mark Hulbert, editor of Hulbert Financial Digest.

Writing in his MarketWatch column, he presented the average return for the Dow Jones Industrial Average for each of the 12 months, going back to the Dow's start in 1896.

August places fourth in the table, with a 1.13 percent return, behind July (1.46 percent), December (1.43 percent) and April (1.21 percent).

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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