Government Bonds Or Stocks? Which Is A Better Choice Now?

Government bonds or stocks? If you were picking an asset class to outperform over the next 18-24 months, which would you choose? Such was an interesting point made by Greg Feirman last week. To wit:

“The market has now priced in a soft landing based on the idea that the Fed can get inflation under control without causing the economy to roll over into recession. As a result, investors have piled into QQQ and completely lost interest in TLT. Personally, I’m of the opposite view:

All the Fed’s tightening is still working its way through the economic system and will eventually cause the economy to roll over into recession. In addition, Big Tech is now mature and will have to be repriced from growth stocks to value stocks, putting significant pressure on the indexes. If I’m correct, this creates one of the best contrarian trades I’ve seen: Long TLT, Short QQQ. TLT closed Monday at $95.58, while QQQ closed at $375.19. My 18-month price targets are TLT $135 and QQQ $280.“

If we use the recent highs for the Nasdaq 100 index ETF (QQQ), Greg is assuming a roughly 38% decline in the Nasdaq. While that sounds like a massive decline, it would only wipe out the 2023 gains. However, the long government bond trade in TLT would net roughly a 42% gain as bond prices returned to the beginning of 2022.

That’s Crazy Talk?

Greg’s assumptions are not as outlandish as they may seem. If interest rates, as shown, return to levels of an expected recessionary period, you can understand the value proposition made. Interest rates are a function of economic growth and inflation. Therefore, when the next recession begins, rates will fall accordingly.

interest rates

We see the same in comparing the annual rate change versus real economic growth rates.

fall during recession