Bonds Beat Equities over 10 Years Says Model With 147 Years Of Data.

 

 

 

 

 

 

 

 

 

 

“Call us cynical, but the prospect of equity market excess returns for the next ten years measuring in the fractions of a percent is not nearly enough compensation for the distinct possibility of underperforming a risk-free asset for ten years.” 

Bonds could be at an historic buy level. The speculative short is now the largest in history.

This extreme position in bonds is coinciding with huge long term support levels for bonds at all maturities. 

Time To Allocate from Equities to a Tactical Bond Model – “Cycle Dynamics Bond” 

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“While we use a slew of different valuation techniques, we tend to prefer the Cyclically-Adjusted Price-to-Earnings (CAPE) Ratio as devised by Nobel Prize winning economist and Yale professor Robert Shiller. The ratio adjusts for inflation and as importantly, uses ten years of earnings data to derive a price to earnings ratio that encompasses business cycles. Shiller’s approach eliminates short-term noise that tends to make the more popular one-year trailing price-to-earnings ratio erratic and potentially misleading.

Currently, the CAPE on the S&P 500 is 33.41. Looking back as far as 1871, today’s valuation has only been exceeded by a brief period in the late 1990’s.

The chart above aggregates the data from the prior chart into ranges of CAPE as shown on the x-axis. It also displays the mean, maximum and minimum of the excess ten year returns of stocks at the various CAPE ranges. This information can be used to create expectations for future performance given a stated CAPE.

With the current CAPE at 33.41 as circled, investors should expect an annualized excess return for ten years of -2.04%. Based on historical data which includes 32 full business cycles dating back to 1871, the best excess return experienced for all instances of CAPE over 30 is 0.39%. Over this 147 year period, there have been 57 monthly instances in which the CAPE was above 30. Only four of these instances provided an excess return over Treasuries and the average was a paltry twenty basis points or 0.20%.

Call us cynical, but the prospect of equity market excess returns for the next ten years measuring in the fractions of a percent is not nearly enough compensation for the distinct possibility of underperforming a risk-free asset for ten years.”

BondsVersusEquities

Bonds could be at an historic buy level

The speculative short is now the largest in history, as shown in the chart below. If the short side is so imbalanced the possibility for a significant price reversal is very high as shown in the chart below.

 

 

 

 

 

 

 

 

 

 

 

 

 

This extreme position in bonds is coinciding with huge long term support levels for bonds at all maturities.

 

Time To Allocate from Equities to a Tactical Bond Model – “Cycle Dynamics Bond”

My tactical bond model “Cycle Dynamics Bond”, currently in cash, could be a low risk way of taking advantage of an exceptional contrarian opportunity, when short maturity bonds already discount 3 rate hikes this year.

By: Chris Belchamber

 

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