Advisors would be wise to limit their bond holdings and shift into European equities, said Michael Jones, chief investment officer of the Riverfront Investment Group.
“I don’t really know where rates are going in the next few years, [but] over the next five to seven years, bond returns are going to be sh****,” Jones told advisors late Tuesday at the Raymond James Financial Services National Conference For Professional Development in Las Vegas.
Nominal returns on 10-year Treasuries are historically equal to their current yields, which means investors will get basically nothing. “You want as few bonds in a portfolio as possible,” he said.
And unlike stocks, bonds don’t bounce back after a correction, Jones said. Over a client’s retirement time frame, “money lost in bonds is gone forever.”
But advisors need to be wary of U.S. stocks, the investment strategist said. “Large-cap U.S. stocks are not a deal anymore. They’re 10 percent to 15 percent overvalued” by Riverfront’s estimate, he said, versus 20 percent to 25 percent overvalued in 2007 and 100 percent too pricey in 1999 and 2000.
What’s more, with the end of quantitative easing in the U.S., the stock market will once again experience normal corrections that investors haven’t seen in awhile, Jones warned. Pull-backs to the 200-day moving average are going to “happen all the time [now] in the U.S.,” Jones said. “Clients need to be mentally prepared for it.”
In contrast, European and Japanese markets will continue to be supported by their central banks. The European Central Bank should pump up equity prices over the next year-and-a-half, Jones said, much like the Federal Reserve did with its quantitative-easing program. “It will be fun, like in the U.S.,” he said.
International developed equities are about 25 percent undervalued, according to Riverfront.