Here's why the 2-year note yield above 5% doesn't shake our conviction in stocks

Published Wed, Mar 8 20233:28 PM ESTUpdated Wed, Mar 8 20233:58 PM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Short-term government bonds of late present real competition for stocks, raising the risk-reward bar for equities in the near term. But the Club's long-term outlook isn't swayed by this current bond market dynamic. In fact, history suggests it might be a good time to buy stocks, according to Jim Cramer. In general, stocks as an asset class are always measured in comparison to U.S. government bonds because those Treasury notes are the closest possible thing to a risk-free investment. Equities carry inherently more risk than U.S. bonds, so if you decide to invest in stocks, you would want to generate a higher return than what you could get from a bond. For many years, historically low bond yields gave rise to the Wall Street acronym TINA — there is no alternative — meaning stocks were the only way to go. But now, we're in what some on the Street are calling a TARA environment: There are reasonable alternatives. The bonds-versus-stocks discussion started to rekindle in earnest last year as the Federal Reserve began an aggressive monetary policy tightening campaign, taking interest rates from near-zero levels in March 2022 to the current target range between 4.5% and 4.75%. That discussion ramped up further Tuesday, after Fed Chairman Jerome Powell said the U.S. central bank may need to raise interest rates "higher than previously anticipated." That helped push the yield on the 2-year Treasury — which is especially sensitive to Fed policy — above 5% for the first time since 2007. US2Y YTD mountain 2-year Treasury yield YTD Also Tuesday, the spread between 2-year Treasury and 10-year Treasury yields reached its steepest inversion since mid-September 1981 — roughly around the start of a severe U.S. recession that lasted more than a year. Historically, short-term yields being higher than long-term yields — known as an inversion — are viewed as a recession indicator. Investors pay especially close attention to the relationship between the 2-year and 10-year spreads. Remember, bond yields moved in the opposite direction to bond prices. That 1981 economic downturn, which officially stretched from August of that year to December 1982, came shortly after a six-month recession in 1980. It was undoubtedly a tough period for the U.S., one also marked by high inflation and a hawkish Fed. It was not, however, a great time to run away from stocks, Jim emphasized Wednesday. Ultimately, it turned out to be nearly the end of an ugly decade and a half on Wall Street. .DJI mountain 1981-09-01 Dow Jones Industrial Average performance since September 1981 "September '81 I got in the business. ... You could say, 'Yes, there was a recession right then.' That was the recession you had to buy into," Jim said Wednesday. "That was the beginning of the great bull market." The many years preceding the start of that bull market were not kind to stock investors. At the end of 1981, the Dow Jones Industrial Average actually was nearly 10% below where it closed in 1965. But the 30-stock Dow went on to soar starting in late 1982, climbing nearly 20% that year and beginning a prolonged march upward. (There was of course the stock market crash in October 1987, which came to be known as Black Monday. However, perhaps surprisingly, the Dow still went on to finish up just over 2% that year.) "If you say the inversion is X [and] has never been this bad since September 1981, I will come back and say, 'That was the great moment to buy in our lifetime,'" Jim said. Bottom line Short-term U.S. Treasury notes are a real alternative to stocks right now. In fact, Jim said Wednesday on CNBC that if someone chooses to buy short-term bonds here, "there's nothing wrong with" that decision. In the fall, Jim even acknowledged that he purchased — for his personal portfolio , which can't hold individual stocks due to employer rules — a tranche of 2-year Treasury notes for the first time in a long time. But Jim stressed that history suggests it would be a mistake to sell stocks simply because of the bond market's current landscape. Rather, it's a reason to be patient and look for opportunities to buy stocks that have been unreasonably beaten down or benefit from long-term themes like infrastructure investment, such as Club holding Caterpillar (CAT). While the Club didn't purchase any stocks Wednesday, during Tuesday's market sell-off, we boosted our holdings of Johnson & Johnson (JNJ) and Emerson Electric (EMR). In the coming days, we may use further rates-driven weakness to put cash to work elsewhere. (See here for a full list of the stocks Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Traders work on the floor of the New York Stock Exchange (NYSE) on August 5, 2022 at Wall Street in New York City.

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