Strategists say stocks will struggle to beat the 5% Treasuries. And what is ‘out-dexing’?

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A top Wall Street forecaster told me how to beat the stock market from here on out: Buy Treasury bills. I’ll leak the tip on Reddit, but I’m not sure how many moon rocket emoji to use.

The six-month Treasury yield is 5.1%. It is closer to “income yield”

S&P 500,

Or earnings as a percentage of value. On that basis, secured bonds are the best deal they’ve been relative to stocks in decades.

“I see a lot of really smart equity people asking this question, which is, ‘Help me make the case. Why do I need to be in US equity?’ says Jonathan Golub, chief US equity strategist at Credit Suisse. “And I tell them, ‘It’s not my job to make the case.’ ,

Investors who can commit to 10 years or more should stick with stocks, says Golub, but their returns are likely to pale in comparison. In the near term, defensive stocks don’t look great. Big tech is bad. Favor consumer stocks and healthcare. And if you’re worried about a market downturn, buy a hedge that’s cheap for now.

At the heart of Golub’s approach is something called uninversion, which sounds a lot like yoga, and rightly so, because I could be pulling a hamstring trying to explain it. Long-bond yields are currently lower than those of short bonds; The 10-year Treasury has recently paid less than 4%. This is an unusual situation known as an inverted yield curve—the “curve” referring to the shape of the yields plotted on a graph. This could mean that investors expect the economy to slow down. They are usually right.

Credit Suisse counts six yield-curve inversions over the past 50 years, with economic downturns occurring an average of every 11 months. The current reversal started in October, so we should see an uptrend by the end of summer. But instead, we won’t get a recession until late 2025, Golub believes. That’s because what matters most for the timing of these things is when the yield curve inverts, and that won’t happen soon, based on pricing on Treasury futures.

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Expect slow growth, high but not steep inflation, and meager income gains. Things won’t get bad enough for a defensive player to hold their own. Credit Suisse’s S&P 500 target implies only 3% upside during the rest of the year. What investors can use is “secular growth,” or a source of growth that doesn’t depend on a strong economy. Big tech has been doing just that for a long time, but it just doesn’t seem particularly developed. During the fourth quarter, market earnings decreased 2% with tech stocks and expanded 5% without them.

Golub calls consumer stocks, healthcare and energy “reasonably attractive.” For investors who are worried about a crash, the stock market volatility index means little fear of one, which means that exercising options to take a long bet on is cheaper than usual.

BofA Research recommends “outdexing,” or owning the S&P 500 index, minus industries that appear unlikely to exceed the 5% to 6% that investors can collect on cash and secured bonds. Most industries fall short, it turns out. Of the 24, BofA has seven likes, notably energy, media and entertainment, and telecommunications. It also includes banks, real estate, transport and pharma.

The cheap stuff is also cheaper than usual, which means returns there can be good, or as the firm’s strategists put it, “valuation spread within the S&P 500 suggests higher-than-normal alpha potential.”

As tempting as it sounds to, um, pare my way through inversion to large alpha, what if I continue to invest in the broad stock market savings? BofA says the S&P 500 is priced for 5% average annual gains and dividends over the next decade, a few points higher than the 10-year Treasury yield. Plunk it is, then.

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duck and coverage

If you didn’t make it to this year’s Association of Insurance and Financial Analysts annual conference in Naples, Fla., you missed a comedian’s panel discussion on annuities. Or so I imagine. Morgan Stanley was there, and it described the mood as “cautious optimism”. I think that’s a fair summary of the business model as well. If you’re going to write a life insurance policy for me, you have to be optimistic enough to think I won’t be gone by Thursday, but cautious enough not to sell too cheap.

That’s only part of it. Since insurance companies today typically charge a fee for benefits they will not provide for many years, if ever, a large part of the job is earning a good return on a safe investment. For almost a decade it seemed impossible. Good returns on safe investments abound now. Hence, the optimism. But if rates rise too quickly, the economy could capsize, which brings us back to caution.

Companies are seeing signs of credit deterioration but are not seeing them yet, writes Morgan Stanley. Its Top Picks in the Group


(ticker: EQH), where it sees more than 50% upside;


(MET), 30%; And


(AFL), 15%.

I spoke last week with Fred Crawford, Aflac’s chief operating officer, who is seen as the favorite to succeed Dan Amos, the insurer’s 71-year-old CEO. Aflac sells supplemental insurance that covers major illnesses and accidents. This is for families who may have a hard time coming up with several thousand dollars to pay for out-of-pocket expenses that their primary insurance doesn’t cover.

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Aflac has a high market share in Japan, with more for growth in the U.S. Crawford says the company focuses on businesses that send employees to insurance exchanges for major medical coverage, but provide additional coverage at a lower cost. wants to do

Aflac’s targeted approach is competitive strength. So does the Duck, which helps keep advertising costs down for a company of Aflac’s size. “It performed as well or better than any other advertising campaign,” Crawford says. “And interestingly, Jack, the conversation with the ducks, goes over very well every year.”

write to Jack Hough at [email protected] follow him on twitter and subscribe to Barron’s Streetwise Podcast,