T-bills at 5%, why look at stocks?

by | Nov 22, 2023 | Podcasts

With T-bills at 5%, why look at stocks?

T-bills:  why not?  One of the most frequently asked questions we have heard over recent weeks is: with T-bills (Treasury Bill) rates at (or around) five percent, why should we even bother looking at putting money into stocks?

The first way in which we would reply is that five percent is not necessarily the “high” for short term rates.  Anything is possible, including a period where rates on T-bills could go higher!  And historically, seeing rates on T-bills at 5% does not makes us want to “rip up the script” and rush out to own T-bills.  That’s because T-bills have a place (an allocation to owning some T-bills) in many investment accounts (but not all).

For reference, one of the drivers behind the stock market crash in 1987 was because LONG-TERM rates on Treasury bonds had exceeded 9%.  With the (back then) historic returns from stocks coming in at 10%, longer-term Treasury bonds offered a viable alternative – for the first time since 1982.   That’s longer-term Treasury bonds – not T-bills.

We have come a long way since “zero” interest rates.  Five percent on T-bills “seems” like a number we have not seen in a lifetime.  We would caution folks to not get carried away with the point T-bills are at 5%.  We fell the past 15 years (since 2008) have been the exception, not the other way around.

Besides, that rate on T-bills may work for the next six months, or next year.  But then what will you do?  Selling stocks (or avoiding investing in them) and buying T-bills creates only a short-term solution for a longer-term (and bigger picture) kind of question.

In podcast episode #462, Tom discusses this question (“with T-bill rates at 5%, why look at stocks?”) along with several other market and investment related questions we have been fielding in the 4th Quarter 2023.
Tune in!

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Transcript for “T-bills at 5%, why look at stocks?”

Welcome back to the podcast. This is episode number 462.
I am your host today, Tom Mullooly, and let’s jump right into it.

Depending on when you’re listening to this, this may be the way to “win Thanksgiving dinner.”

We’re going to cover topics that we have been asked, questions we have been asked, by clients and by callers over the last couple of weeks.
Things on people’s minds, that are, in one way or another, might be forcing them to make – or not make – investment decisions.
So let’s jump right into it.

We’ve got six of them that we’re going to cover, and I want to give a hat tip to the New York Post and Ken Fisher, who echoed the same topics that we’re going to cover in this podcast.

#1 Why risk money in stocks, when Treasury bills. T-bills – are yielding 5%?

That’s a real question we have been getting – multiple times a day – for the last several weeks.

Here’s how we would address this. You have to remember that inflation is at 3.7% at the time that we’re recording this, in November of 2023.
You’re earning 5% on a T-bill.

Maybe that T-bill is six months, maybe it is a year, maybe you’ve got a Treasury note that’s going to come due in 18 months, two years, something like that.

Inflation is at 3.7%. Inflation takes away three quarters of that 5%. It evaporates, due to inflation. So really you’re left with a net return – before tax – of 1.3%.

Now, historically that sounds about right. The net real rate of return, that is, the nominal rate, 5% less the rate of inflation – and right now that’s 3.7%, the real rate of return 1.3%.

And historically that sounds about right. I’ll also add something else that a lot of people lose sight of – is that inflation has averaged since 1926 — so we’re going on almost 100 years – inflation has averaged 3%.

In the same period, stocks have returned much more. In fact Ken Fisher uses 10.1% for the returns on stocks since 1926.

Now I don’t know what index – or what yardstick – Ken Fisher is using. The Dow has certainly been around since the 1890s, but the S&P 500 has only been around since the 1950s, so I’m not really sure what yardstick he’s using.

I will only say that it really doesn’t matter where you draw the line: 1946, 1936, 1926. Over long periods of time stocks have returned much more than the rate of inflation.

I’ll also go on to add a little more here about T-bills. They are taxable on the federal level and they’re taxable as income.
It’s not even taxed at capital gain.

You do get a small tax break because you don’t pay state income taxes – if you happen to live in a state where you have state income taxes, that’s exempt. So there is a little more to the yield that comes with that.

But you take 5 percent, on a T-bills right now. That may only be for six months, depending on how long you lock it up, for.
Inflation is currently running at 3.7 percent. So take away about three quarters of that, you’re left with 1.3 percent.

You have to pay federal tax on that.
You’re not really left with much.

You are actually ahead of where you were – just a short while ago – when interest rates were down near zero and inflation was about the same.
You actually, after tax you might have had a negative return (then).

Why take a chance on stocks when T-bills are yielding 5 percent?
It’s usually a sign there is some kind of turmoil – or anxiety – in the market. And so when rates on CD and T-bills get people’s attention, it’s probably not a bad time to be looking at stocks, either.

We’re not market timers. And we’re not trying to make a call. But it’s important to just keep in mind. When the risk is high, it’s probably not a bad time to be looking at putting money to work.

2. From the complete opposite end of the spectrum, we’re now getting questions from folks who are saying,
“Hey, can’t I lock in some good bond yields now and make money?”
“Because, hey, Tom, I know that when interest rates go down, bond prices go up! And so when interest rates fall, these bonds should give us a pretty good return. Right?”

Let me answer a question – with a question – which I know I’m not supposed to do.

Are interest rates going to fall?
Are they going to fall anytime soon?
Are you sure?
That’s three questions, sorry.

Every time this comes up, I take a pause to the conversation – just to remind folks – the Fed raised rates from 0% to 5.25% on short-term interest rates. They did this in 14 months. That is lightning quick.

So the Fed went from 0% to 5.25%, or 525 basis points in 14 months.

Honestly, if you said that – to any market strategist or economist in the last 40 years, they would have told you we “were all going to die,” or that there was going to be an economic crash like we’ve never seen before. It would be very bad for the economy in general.

I have news. The Fed did all of this in a 14-month period.
We didn’t die.
We’re still here to talk about it. And, in fact, the market has recovered very nicely – we didn’t crash the economy.

In fact, 3rd quarter GDP, the gross domestic product, was up almost 5%. It was up 4.9%.

So, question for you – in return. Again – does the Fed need to lower rates?
I don’t know.
I don’t think so, right now.

I don’t think they need to lower rates at all.

And all of these folks that are out there making predictions that the Fed is going to cut rates “two times” next year, “three times” next year. There was an article over the weekend in Forbes that said that the Fed is going to be cutting rates “four times in 2024.”

Where are they getting this from?

They are projecting the economy is going to slow down and that the Fed will need to act.
I don’t know.

I’m not going to make a prediction. But I don’t really see the need for the Fed to be aggressively cutting rates.

And so, if rates are going to stay where they are, or maybe down a little tick, I think the “bond arbitrage” trade, the “hey, let’s buy bonds because we’re going to see a snapback in yields – a snap, you know, move down in yields.”

I don’t know if that’s actually coming and I wouldn’t put money at risk in something like that.

3. The next question we get asked a lot is “what about the earnings recession?” Isn’t that going to hurt stocks? Isn’t that going to drag the market down?

I have an interesting statistic for you. As of the date of this recording – we’re recording this in the third week of November of 2023 – 88% of the S&P 500 companies have reported earnings for the third quarter. Earnings are up. They’re up over 4%. And earnings-per-share are not just coming from cost cutting either.

For many companies – sales, the top line revenue, is up as well. And so, with seven out of eight S&P 500 companies already reported earnings, we are NOT seeing an earnings recession.

In fact, we’re continuing to see earnings growth.

4. Okay, another question that we’re getting asked quite frequently – in the last few weeks: what about the Middle East?
What about that? I’m not trying to belittle the situation, but Gaza, Lebanon the region we’re talking about – when you’re looking at global GDP, it’s a half of 1%.

The Middle East wars historically will spur a spike in oil prices. But, very interestingly, I’ll point out that the major oil companies are not involved. And so we’ve actually seen oil prices — go look it up — oil prices have actually fallen below where they were, when things started in the Middle East on October 7th.

Things are not unfolding the way people expect, and that kind of brings me to a larger point. The market tends to do the opposite of what most people are expecting.

If you’re listening to this podcast, you’ve probably read that – over the last year, many economists and market strategists have been calling for a recession. And they have been wrong.

Most of the time what’s happening is these folks are opening up their college textbooks, their economics books. And they’re saying “when these things happen,” (for example) when the Fed raises interest rates, when certain things unfold, “you’re going to see a recession in 6 months; in 12 months.”

That has not happened at all.

So I don’t know if we’re going to have a recession. I don’t know if it’s eventually going to land in our lap, but things have not gone by the textbook.
Don’t use textbooks when it comes to investing!

5. Next point: the consumer is completely tapped out.

I have a hesitation about agreeing with this. I don’t necessarily agree.

Yeah, a few weeks ago, we saw a lot of headlines, because credit card balances – for the first time in history – exceeded a trillion dollars.

I mean, just think about a trillion! But one trillion of anything — one trillion M&Ms — it’s a lot! It’s a huge number.

So a trillion dollars in credit card balances says “whoa, whoa, whoa… you’ve got our attention!”

It seems like we’re piling on the debt. But it’s really – when you do the math – and statistics are only good IF you have the numerator AND the denominator – one trillion dollars in credit card balances represents 5.3% (ust over 5%), of after-tax revenue here in the United States.

Now, by comparison, in 2006 and 2007, prior to the meltdown that we saw in 2008 – in 2006 and 2007, that number – the credit card balances – represented 8% of after-tax income.

Yes, it’s high and it’s an uncomfortable dollar number. It’s not necessarily a level that we have been at before. It’s not necessarily at a level that has invoked some kind of trouble in the past. I think we’re gonna be okay.

One other thing when we’re talking about credit card balances. Just 1.6% of all credit card balances are 90 days late.

Yeah, there are some large credit card balances out there that we’re starting to see. But when you talk about late payments, we are in good shape.

So just 1.6% of all credit card balances are 90 days or more late. And, incidentally, that is near a record low. The record low was set a year ago, in the fourth quarter of 2022. So the consumer continues to act well, continues to carry the economy.

6. Okay. So then the next point that comes up a lot is “well, what about the election? What about politics?”

What about gridlock in Washington? What about all these things? I will tell you, it seems to be something I seem to be talking about every four years or so, but gridlock WINS. Gridlock wins again, and it usually does.

When you’ve got gridlock in Washington, very little gets accomplished. And that’s a good thing.
We don’t like change. Many times, change comes in the result of higher taxes for you and I. I don’t see the benefit in something like that.

I’ll also add that, just looking in history in election years, going back for the past 100 years. When you are looking at what the market will do in an election year, 83% of the time – so it’s every four years, so it’s 25 years over the last 100 years. In election years, since 1925, stocks are up, 83% of the time.

These are just some of the questions that we have. This is gonna be “dining table chit-chat” topics that you can launch into and win the conversation at the Thanksgiving Day table. Or conversations that you have over the next few weeks as we move into the holidays.

If you’ve got questions, we’d be happy to talk about them with you. Feel free to reach out to us.
But that’s gonna wrap up episode 462 of the Mullooly Asset Podcast. Thanks for tuning in.

Tom Mullooly is an investment advisor representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions in securities discussed in this podcast.


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