6 ms·

One effect of this is that stocks historically average about 8% a year. As this gets closer to that number you can expect money from the stock market to start p

One effect of this is that stocks historically average about 8% a year. As this gets closer to that number you can expect money from the stock market to start pouring into bonds. Why take risk when you have a guaranteed yield? This will probably drive the market down much further than it has in 2022.

boringg 3y ago
Average is not a great way to measure about stock returns - though it helps illustrate your point. Equity can evaporate -- unlikely US T will though the politicians certainly are trying.
- username332211 3y ago
  Intuitively it doesn't make sense, but companies can outlast bonds, currencies and indeed the governments that issue them. Daimler-Benz has survived the fall of 3 German governments, the loss of 2 rather large wars and a number of periods of hyper-inflation that accompanied them that'd have made any bond worthless. We're not there yet, but people do go bankrupt gradually and then suddenly.
  - boringg 3y ago
    Fair but I would say that is by far an exception rather then anywhere close to the norm.
jgalt212 3y ago
Yes, but taxes on capital gains are much, much lower than taxes on interest. You probably need bond yields to be about 10-12% to be tax equivalent to equities returns. Using your 401K, you can create tax equivalency between stock and bond returns. But then that creates perverse outcome of putting shorter duration / lower risk assets in your longer duration savings account. Thanks Washington!
- toomuchtodo 3y ago
  Fixed income with qualified dividends somewhat avoids this tax drag. EDIT: Retracted, I'm mistaken, qualified dividends only apply to returns from a US corporation or a qualified foreign corporation. You would need to build a ladder with a holding period sufficient to realize LTCG rates from a fixed income product.
  - tempsy 3y ago
    What is an example of "fixed income with qualified dividends"? Interest received from treasuries are taxed like ordinary income. The only special tax benefit is interest income is exempt from state income taxes.
    - toomuchtodo 3y ago
      Comment I replied to used the word "bonds", not "treasuries".
      - tempsy 3y ago
        Which bonds would that include? "Qualified dividends" is a term used to describe dividends received from equities. It's not a term related to fixed income unless I'm missing something. There are things like municipal bonds that are tax exempt, but the yield is usually lower.
  - deleted 3y ago
    [deleted]
- ac29 3y ago
  > Yes, but taxes on capital gains are much, much lower than taxes on interest. Not true in California: Capital gains are taxed at normal income rates, and treasury interest is state tax exempt. For the hypothetical taxpayer earning $100k/year: Long term capital gains: 15% federal + 9.3% state = 24.3% total tax Treasury interest: 24% federal + 0% state = 24% total tax
esotericimpl 3y ago
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TacticalCoder 3y ago
> One effect of this is that stocks historically average about 8% a year. And stocks in rising interest rates environment only average 6.4% a year, not 8%. Here's a study over 13 periods where interest rates rose in the US since 1962 to 2020: https://www.lpl.com/newsroom/read/weekly-market-commentary-rising-rates-stock-market-performance.html https://www.lpl.com/newsroom/read/weekly-market-commentary-r... So, indeed, many are now simply doing this: selling (or pausing their buy/DCA) stocks and taking the guaranteed yield. I typically considered USD/EUR toilet paper but at 5.6% short term I'm now putting some of my money in short term treasuries. And I'm DCA'ing the proceed into stocks. > This will probably drive the market down much further than it has in 2022. I remember my family (in the EU) getting 13%+ interest rates on government bonds when I was a kid. We're "only" at 5.6%: rates have and could again go much higher.
landemva 3y ago
Another effect will be to make the 'buy house/condo in resort town and airbnb the mortgage' less attractive. That game was played when yields were paltry and mortgages cheap.

boringg 3y ago

Average is not a great way to measure about stock returns - though it helps illustrate your point. Equity can evaporate -- unlikely US T will though the politicians certainly are trying.

username332211 3y ago
Intuitively it doesn't make sense, but companies can outlast bonds, currencies and indeed the governments that issue them. Daimler-Benz has survived the fall of 3 German governments, the loss of 2 rather large wars and a number of periods of hyper-inflation that accompanied them that'd have made any bond worthless. We're not there yet, but people do go bankrupt gradually and then suddenly.
- boringg 3y ago
  Fair but I would say that is by far an exception rather then anywhere close to the norm.

jgalt212 3y ago

Yes, but taxes on capital gains are much, much lower than taxes on interest. You probably need bond yields to be about 10-12% to be tax equivalent to equities returns. Using your 401K, you can create tax equivalency between stock and bond returns. But then that creates perverse outcome of putting shorter duration / lower risk assets in your longer duration savings account. Thanks Washington!

toomuchtodo 3y ago
Fixed income with qualified dividends somewhat avoids this tax drag. EDIT: Retracted, I'm mistaken, qualified dividends only apply to returns from a US corporation or a qualified foreign corporation. You would need to build a ladder with a holding period sufficient to realize LTCG rates from a fixed income product.
- tempsy 3y ago
  What is an example of "fixed income with qualified dividends"? Interest received from treasuries are taxed like ordinary income. The only special tax benefit is interest income is exempt from state income taxes.
  - toomuchtodo 3y ago
    Comment I replied to used the word "bonds", not "treasuries".
    - tempsy 3y ago
      Which bonds would that include? "Qualified dividends" is a term used to describe dividends received from equities. It's not a term related to fixed income unless I'm missing something. There are things like municipal bonds that are tax exempt, but the yield is usually lower.
- deleted 3y ago
  [deleted]
ac29 3y ago
> Yes, but taxes on capital gains are much, much lower than taxes on interest. Not true in California: Capital gains are taxed at normal income rates, and treasury interest is state tax exempt. For the hypothetical taxpayer earning $100k/year: Long term capital gains: 15% federal + 9.3% state = 24.3% total tax Treasury interest: 24% federal + 0% state = 24% total tax

esotericimpl 3y ago

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TacticalCoder 3y ago

> One effect of this is that stocks historically average about 8% a year. And stocks in rising interest rates environment only average 6.4% a year, not 8%. Here's a study over 13 periods where interest rates rose in the US since 1962 to 2020: https://www.lpl.com/newsroom/read/weekly-market-commentary-rising-rates-stock-market-performance.html https://www.lpl.com/newsroom/read/weekly-market-commentary-r... So, indeed, many are now simply doing this: selling (or pausing their buy/DCA) stocks and taking the guaranteed yield. I typically considered USD/EUR toilet paper but at 5.6% short term I'm now putting some of my money in short term treasuries. And I'm DCA'ing the proceed into stocks. > This will probably drive the market down much further than it has in 2022. I remember my family (in the EU) getting 13%+ interest rates on government bonds when I was a kid. We're "only" at 5.6%: rates have and could again go much higher.

landemva 3y ago

Another effect will be to make the 'buy house/condo in resort town and airbnb the mortgage' less attractive. That game was played when yields were paltry and mortgages cheap.