Bonds can serve as a suitable alternative to stocks.
Since the start of the year, the U.S. stock market, represented by the S&P 500, which includes the 500 largest U.S. listed companies, has seen a rise of approximately 11%. Historically, it takes Wall Street much longer than a year to achieve such a gain.
This rally is surprising given the significant decrease in interest rate expectations in the U.S. Initially, investors anticipated around five interest rate cuts from the Federal Reserve. Now, market participants aren't expecting the first monetary easing until at least September and are predicting a total of only two rate cuts.
The reasons for this are persistent inflation, which was 3.4% in April, just slightly below the previous month's rate, and a favorable economic situation with a strong labor market. While the number of jobless claims rose slightly above expectations, employment in the U.S. remains almost at capacity.
With first-quarter results for U.S. companies coming in positively, investors might not have as much good news to support the market during the summer lull. This could prompt a market correction, which wouldn't be unexpected after such a strong rally and could also be beneficial in the long run.
European markets have followed the U.S. performance exceptionally well this year. However, unlike in the U.S., it's not an economic boom that's fueling corporate profits and stock prices. On the contrary, the ECB is likely to cut interest rates more aggressively than the Fed due to a struggling economy.
In addition, European stocks are valued more attractively than American stocks. However, the faster earnings growth in the U.S. warrants higher valuations. As such, the outlook for equities is positive in the long term, despite the risk of a correction.
Now is not the time to invest all your money in dividend stocks. Bonds offer attractive yields. United States ten-year government bonds currently yield an interest rate of 4.5%, significantly higher than inflation. These investments provide a real return.
Bond markets are expecting long-term interest rates to continue rising due to the robust U.S. economy. If interest rates increase by 0.25%, it would cause a price drop of roughly 1.75% for the corresponding bonds, but investors would still see about a three percent return this year and almost five percent next year. The risk is low since the U.S. government is regarded as one of the world's most reliable borrowers.
With an increase of 18% since the start of the year, gold has outshined both stock markets and bonds. Central banks in emerging nations have been buying gold to diversify their currency reserves and reduce their reliance on the U.S. dollar. The recent Gaza conflict and China's provocations against Taiwan have further fueled gold demand. Furthermore, gold serves as an inflation hedge, as U.S. inflation refuses to fall below three percent.
Potential future growth for gold could come from increasing government debt. President Joe Biden's government's stimulus measures have led to a substantial increase in the U.S. deficit. The U.S. debt stood at around 120% of GDP last year. Only Italy and Japan have larger debt mountains. Gold is also seen as a buffer against potential out-of-control U.S. national debt.
If you have €25,000 to invest, consider allocating 40% to U.S. stocks with a focus on growth-oriented companies. Diversify into U.S. and European bonds with medium maturities, making up 20% each. Allocate 10% to gold, and buy gold futures with the expectation of a drop towards $2,200 per ounce. Finally, keep 10% in cash for the opportunity to buy more shares at reduced prices in the event of a possible correction. This information is not intended as investment advice.
Markus Lorbach has been working at Qcoon-Invest since 2019, specializing in investment advice and management as well as family office services. Previously, he held roles in various savings banks in investment advice and trust administration.
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Source: www.ntv.de
