The Glassman/Hasset logic implies that the expected return of corporate bonds ought to be lower than that of treasury bonds.

Look at the stocks vs. bonds question from the viewpoint of a corporate treasurer. If the expected return of equities ought to be same as that of treasury bonds, what ought the expected return of corporate bonds to be? Corporate bonds are riskier than treasury bonds – unlike the government, corporations cannot print money to pay off bondholders. Rational investors will demand some compensation in the form of higher expected return for the added risk they assume.

It follows that the expected return of corporate bonds should be higher than that of treasury bonds, and a quick look at bond yields will show this to be true. If, as Messrs. Glassman and Hasset suggest, the appropriate expected return for stocks is the same as that of treasury bonds, the expected return of corporate bonds must be higher than that of stocks. But this logic is flawed. Equities are junior claimants to corporate earnings, and consequently, stocks are riskier than corporate bonds. It follows that the expected return of stocks must be higher than the expected return of corporate bonds, which in turn must exceed that of government bonds.