by jay johannesen
10. November 2011 05:56
For the 30 year period ending September 30 Treasury Bonds outperformed the general stock market. This is the first time this has happened since the Civil War.
The financial press has made much of this event, using the opportunity to pick on equities and lavish praise on Treasury Bonds.
Prominent financial gurus, Bill Gross, Meredith Whitney, Jeremy Siegel are castigated in this Bloomberg article, for their bets earlier this year against bonds. This seems unfair.
Thirty years is a rather arbitrary time-frame. Investors, (well at least journalists), do seem to fixate on these arbitrary performance metrics. Recall the noise these same folks made when US equities suffered negative prices during the 10-year period from January 1, 2000 to December 31, 2009. This particular 30-year period during which bonds outperformed equities stretches from Federal Reserve Chairman Paul Volker's assault on stagflation back in 1981 through the de-leveraging of 2011. These particular circumstances were uniquely suited for interest rates declining and thus bond values to rise.
Jeremy Siegel, author of the 1994 book “Stocks for the Long Run,” said in a telephone interview Oct. 25: “The rally in bonds is a once in a millennium event, but it’s absolutely mathematically impossible for bonds to get any kind of returns like this going forward whereas stock returns can repeat themselves, and are likely to outperform,” he said. “If you missed the rally in bonds, well, then that’s it.”
While we agree with Professor Siegel's point above, we would also remind investors that bonds could still outperform for some time as evidenced by the deflationary situation that has prevailed in Japan for years. Portfolio Research's Dynamic Portfolios continue to maintain bond exposure, because we believe in diversification and controlling risk.
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