April 16 (Bloomberg) -- Treasury yields below zero on an inflation-adjusted basis for only the second time since Dwight D. Eisenhower’s presidency have split Wall Street’s biggest firms, underscoring the relative-value dilemma equity investors face following the biggest first-quarter rally in 14 years.
For Goldman Sachs Group Inc.’s Peter Oppenheimer, U.S. stocks offer a once-in-a-generation buying opportunity after yields on 10-year Treasuries fell to about minus 0.3% when the rate of inflation is deducted. Morgan Stanley’s Adam Parker advises caution, saying Federal Reserve stimulus that has led the fixed-income rally can’t last forever.
Last month’s jobs growth, which was lower than estimated by any economist in a Bloomberg survey, underscored the economy’s reliance on the Fed’s help since the financial crisis began in 2007. At the same time, record-low yields on Treasuries are driving investors to riskier assets such as stocks, said Howard Ward at Gamco Investors Inc. in Rye, New York.
“Capital will chase returns,” Ward, who helps oversee $35 billion, said in an April 11 phone interview. “There’s a tremendous shortage of investment income and there are fewer places to go to generate that,” he said. “Stocks are to a large extent the only game in town for earning a respectable return.”
Ward favors technology companies such as Apple Inc., Qualcomm Inc. and Microsoft Corp. given their earnings potential, as well as consumer stocks with emerging-market operations like Starbucks Corp. and Nike Inc.
Equities fell last week, driving the Standard & Poor’s 500 Index down 2% to 1,370.26 in its first back-to-back decline since November, after the government reported that American employers added 120,000 jobs in March, fewer than estimated by the 79 economists in the Bloomberg survey.
The index has declined 3.4% from its four-year high on April 2, trimming gains of as much as 29% in the past six months, after the Fed said it won’t add more stimulus unless the economy falters or inflation tops its 2% target. The S&P 500 slumped 0.2% to 1,368.05 at 10:32 a.m. New York time today.
The central bank already bought $2.3 trillion of bonds in two rounds of asset purchases and started a $400 billion program known as Operation Twist to replace short-term debt in its holdings with longer-term securities. Yields on 10-year Treasury notes fell below 2% last week after reaching a five-month high of 2.40% in March.
Consumer Prices Gain
Consumer prices excluding food and energy rose at a 2.3% annual rate last month, the government said April 13. Yields on 10-year Treasuries ended the week at 1.98 percent.
Benchmark 10-year Treasuries have yielded less than zero on an inflation-adjusted basis at the end of every month since November as concern Europe’s debt crisis would derail the global economic recovery pushed investors to the safety of government debt. U.S. bonds returned 9.61% since Dec. 31, 2010, according to Bank of America Merrill Lynch indexes. The S&P 500 added 12%, including dividends.
With bonds so expensive, prospects for stock returns are “as good as they have been in a generation,” Oppenheimer, Goldman Sachs’s London-based chief global equity strategist, wrote in a March 21 report. Share prices are too low given the economic outlook, he said. Oppenheimer recommends shares of global energy companies, Japanese industrial stocks, and U.S. technology corporations, according to an April 10 note.