I am on the fence regarding stocks vs. bonds, but there are plenty of reasons to think bonds might do better than stocks in the coming decade. It happens sometimes, and this would represent the reversal of a decades-long trend. We should keep in mind that trends always reverse!
Remember that the last 40 years have featured several equities-boosting macro changes that probably cannot happen again:
1) Globalization reduced the price of everything, enabling high trade and government deficits, while also expanding US export markets and lowering deadweight losses (economists' term for tariffs and taxes). Globalization is now in full reverse with broken supply chains due to COVID, broken supply chains due to the Russian war, and the re-communism of China. Trade barriers are going up and higher-cost local production is being preferred around the world.
2) Tax rates fell over the past 40 years, creating huge national debts in most industrialized countries that seem to be exacerbating the effects of economic cycles. Continuation of low-tax policies may lead to issues such as illiquidity in government bonds or rapid currency collapses like we've seen with the once-mighty British pound and Japanese yen. So there might be growing resistance to trading more instability for the promise of more jobs if we only cut taxes.
3) The labor force participation rate for women increased several percentage points due to cultural change between the 1980s and 2010s. Now the trend is downward.
https://fred.stlouisfed.org/series/LNS113000024) Corporate profit margins may have peaked after a two-decade rise and are on their way down due to higher demands from labor, taxes, bondholders, etc. This Economist article summarizes many of the reasons:
https://www.economist.com/business/2022/10/09/have-profits-peaked-at-american-businesses Similarly, union membership was cut in half between the 80's and today, but there may be signs of that trend reversing too.
5) Information technology is no longer delivering productivity breakthroughs at the same pace as we enjoyed in the era when people learned to use the word processor and spreadsheet. Investment seems to be flowing into applications like social media and entertainment, which reduce productivity rather than enhance it, and which look like a race to the bottom in terms of margins for content delivery.
6) The Shiller PE ratio is still around 28, even after the bear market of 2022. The mean is about 17. In terms of PE ratios, the S&P500 is still about 23% above its mean. So when we talk about the "average" long-term total return of stocks, we must keep in mind that on "average" valuations were much, much lower.
7) The U.S. overall labor force participation rate peaked at 60% in 1999, has fallen to only 56.8% today, and is highly likely to fall further due to demographic aging and millions of long-COVID disabilities.
https://fred.stlouisfed.org/series/LNS11300002 This means the dependency ratio will go higher, and the US could get stuck in a Japan-like stagnation where people refuse to spend money out of a fear they'll need it to care for their parents. Recall what happened to the Japanese stock market since about 1990, and realize that buying bonds would probably have been a better bet for Japanese investors. The labor force participation trend for Japan looks similar to the US, just a couple of years ahead:
https://fred.stlouisfed.org/series/JPNLFPRNAThere are also some strategic reasons to take a hard look at bonds for the first time in one's investing lifetime:
8) My bond screener shows lots of investment-grade bonds from well-established corporations yielding 7-8%. For stocks to outperform bonds, stocks will have to beat today's higher bond yields at the same time their interest expenses are going way up and probably at the same time as they divert cash flow toward de-leveraging, and at the same time their customers are also paying higher interest rates and de-leveraging. The Federal Reserve might not cut interest rates immediately during the next recession, because that's the behavior which got us into so much trouble in the 1970s, when inflation bounced back after each recession / rate cutting cycle.
9) If you foresee a recession in our near future, with inflation falling and interest rates being cut, then bonds might be the place to be. Depending on duration, they might not be as volatile as stocks on the way down. Then, as soon as rates are cut, they will appreciate. E.g. If rates and inflation are heading back to 2%, your bonds yielding 6-7% will be in high demand. When interest rates bottom, that's a great time to sell your bonds and rotate back into stocks, which will probably still be beaten down. Historically, stocks have taken years to recover from recessions because their earnings take years to recover, but bonds tend to be much more immediately sensitive to interest rates.
10) Bonds as an asset class are inherently safer than stocks, due to their senior claim to assets in a bankruptcy and the legal necessity of interest being paid. In the scenario above, where inflation falls to 2-3% over the next few years, then those holding long-duration bond-heavy portfolios yielding 6-7% will be enjoying coupon yields with about a 4% premium over inflation - while holding an asset class less susceptible to Sequence of Returns Risk. These yields would represent a perpetually safe 4% withdraw rate with no drawdown of principal - the goal of ALL our busy talk about asset allocation, flexible spending strategies, safety funds, contingency plans, market timing, etc. We don't have to talk about that stuff anymore, because you can just go out and buy a 4% WR now and the only way that fails is in a scenario where inflation outruns yields AND exhausts principal. E.g. a decade of the WR increasing at 10%/year would probably kill it, but not much else. And that particular high-inflation scenario is not a scenario a stock-heavy portfolio would likely survive either. When we think about other scenarios, the strategy shines: The strategy does well if we endure Japanification, a long period of low or negative growth, a series of crises like the past two decades, OR steady economic growth amid falling interest rates.
11) Most models forecast a recession in 2023 - the depth of which we cannot know in advance. We can, however, look at a chart of interest rates or CPI and see that recessions tend to result in falling inflation and falling rates. This means just as bonds collapsed in resale value due to rising interest rates in 2022, they could rise just as quickly in resale value when the rate cuts come. Recall that a bond bought at time x will increase in value if rates are cut in a future time, and will decrease in value if rates are raised in a future time. Thus you can "buy the dip" in bonds and ride them out, earning yield the whole time, until a future date when rates are lower.
https://fred.stlouisfed.org/series/FEDFUNDShttps://fred.stlouisfed.org/series/CPIAUCSL (Edit > Units > switch to % change from a year ago)