Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
What nuanced nonsense! The article had many words, and just about zero new market interpretations. Change is continuous; that’s not an unexpected proclamation.
Change always happens, especially among various investment asset classes. It is an integral characteristic of the marketplace, and always has been.
This can be easily documented by simply visiting the Portfolio Visualizer website. One component of that site has a very comprehensive segment correlation section that does all the hard work. If you are so inclined, please give it a look-see-use tryout. Here is the direct Link to the asset class correlation portion of that resource:
All a user needs to compare the dynamic nature of segment correlations is to input different starting dates. All the asset correlation coefficients are automatically calculated and even segment average returns and volatility are helpfully provided. It’s fun. Enjoy.
I do believe that the market returns have a strong pull to a regression-to-the-mean. Much market evidence supports that tendency. If several market segments are currently out-of-whack, these dislocations will be recognized by both professional and amateur investors, and there will be trading pressure to a reversion such that more normal outcomes will return.
To illustrate and for convenience, the 3-year comparison of the Vanguard Total Stock market ETF performance compared to the Vanguard Total Bond Market ETF serves well as a potential test of the regression hypothesis. The current outstanding 3-year bond results compared to overall stocks is anomalously high when contrasted against longer-term historical levels.
Check the relative returns of these two accessible Vanguard products over a longer timeframe, such as a 10-year period. I believe that the odds favor a regression-to-the-mean. The longer haul data suggests stronger future stock returns over present values whereas bond rewards will likely diminish. Time will be the ultimate arbitrator.
Personally, I’m not "stuck in the middle"; in reality, the article is a waste of good ink and space. I remain patient and await a return to the normal distribution and relative distribution of asset class returns. Their correlations will vary over time based on economic circumstances.
I’m not making major changes to my portfolio’s asset allocations. What do you think?
Your suggestion that “This Time is Different” rests on shaky grounds. Anyone who plays that investment style better have deep pockets and some evil desire to commit investing hari-kari. Deep pockets because it doesn’t happen all that often, and in the long run it is a Loser’s Game.
I hope you were simply trying to encourage a dialogue.
“More money has been lost because of four words than at the point of a gun. Those words are ‘this time is different’.” That’s not me talking. It’s from a book authored by Professors Carmen M. Reinhart & Kenneth S. Rogoff who take a very militant stance against that proposition. They conclude that “When You Hear ‘This Time Is Different’ Don’t Walk, Run”. I haven’t read the book, but here is a Link to a review article:
Perhaps it is different this time and outstanding bond returns will continue to challenge equities as your post suggests that as a possibility. I consider those long odds, and I do not accept that likelihood. Taking that position is dangerous; it’s a very long shot. Anyone who does accept that shot will be either a hero or a clown.
Too many race track betters have been bankrupted playing the improbable long odds. That’s not my game. I am an investor not a gambler.
MJG You may want to go back to 1958 and what happened to stock yields vs bond yields. It was a big thing at the time. Something that had never occurred in history and remained that way for many decades. Albeit not suggesting that it is different this time just that in the past it was.
In a recent issue of his newsletter Economics & Portfolio Strategy, Bernstein recounted what it was like in 1958 when T-note yields -- for the first time in U.S. history -- jumped above the stock market's dividend yield:
"This ... was unprecedented. The two yields had come close in the past but had always backed away at the critical moment. In 1958, they reversed their historical positions and have never looked back.
Thank you reading my post and contributing to the discussion.
I was not immediately aware of the roughly 2 decade market timeframe starting in 1958 that you referenced in your reply. At that referenced date, I had only started investing a couple of years earlier. But my information shortfall was easily rectified.
I simply went to the Internet and linked to the New York University Stern school annual returns listing. Here is the Link to that nice data summary:
Given the source, I presume this data package is accurate. I am not overwhelmed by the 10-year T. Bond returns over stocks even for that excellent period for the bond issues. The 10-year bonds did outperform stocks in 8 years of those 20-year annual periods. Even in that carefully selected timeframe, I doubt that the bond cumulative returns exceeded stock performance (I did not do the cumulative calculation).
But the Stern school did do both the arithmetic and geometric averages for the respectable 1966 to 2015 timeframes. From my perspective, that's a very meaningful period. For that extended time period the S&P 500 delivered 11.01% and 9.60% annual arithmetic and geometric returns, respectively. During that same period, 10-year T. Bonds produced 7.12% and 4.82% arithmetic and geometric annual returns, respectively.
Stocks win because they are risky and they generate returns both from dividends and price appreciation. It is certainly true that stock dividends have been contributing less to that total return than they did in the past. But the total return is what is most meaningful to me, and I suspect to many other investors.
This is not to say that fixed income is not a major portion of my portfolio. It is. Even at an age in excess of 80, I still have a 60/40 portfolio mix. Portfolios benefit from the diversification with low correlation coefficients between these two asset classes.
That portfolio split might be a tiny bit misleading since my wife and I both have social security and company retirement annual incomes. I count those as part of my fixed income segment since they are pretty secure with small incremental annual pluses. So the active portion of my portfolio is very heavily weighted in Equity and Balanced mutual funds.
Many thanks once again, and many good hopes for your portfolio management style. There are many ways to win at this game. Unfortunately there are many more ways to lose.
MJG I think you missed my point. This has nothing to do with the *performance* of stocks vs. bonds. Just the unthinkable and this time it really was different as 1958 was a watershed event in that for the first time ever bonds yielded more than stocks.
It is indeed possible that I missed your point. I read and responded to your post after midnight, and that’s well beyond my normal bedtime.
But I remain puzzled by the emphasis that you and others place on the fact that stock dividends fell below long term treasuries in 1957. Total annual returns are the pertinent measure of any investment’s anticipated value.
I generally don’t sweat the finer details because bottom-line outcomes matter most. As an amateur investor, I frequently don’t know the finer details. If I did know those finer points, I would likely make errors in properly assessing them.
The data from the time period that you called attention to demonstrate the unpredictable volatility of various asset class returns. In 1960, bonds outdistanced the S&P 500 return by a whooping 11.64% to 0.34%. In the next year, a more conventional return to normal occurred. In 1961, stocks returned 26.64% while the 10-year treasuries delivered 2.06%. I doubt that very many market gurus projected these sudden changes; surely far fewer projected both outcomes.
The economic environment does change. But the public’s emotional reactions to the marketplace change far more quickly and unpredictably. As Phil Tetlock’s research proves time and time again, forecasting is a truly hazardous business. Repeat winners are rare birds.
Do you remember Elaine Garzarelli? She became a hero based on her accurate Black Monday call decades ago. Her subsequent predictions, however, were much less prescient. An analysis of her market predictions between 1987 and 1996 found her to be right only five out of thirteen times, But she’s a survivor. She is currently running Garzarelli Capital. Her predictions both then and now are based on a 13 factor model. Over time that model has been revised in terms of weightings on each factor.
Nobody can predict the future with statistical accuracy trustworthy enough to make major portfolio adjustments. As John Kenneth Galbraith said: “The only function of economic forecasting is to make astrology look respectable.” In his book, “Contrarian Investment Strategies”, David Dremen concluded that forecasters are wrong 75% of the time. Trust these charlatans at your risk.
In "The Black Swan," Mr. Taleb controversially recommends a "barbell" strategy. In that strategy, investors put 90% of their portfolios in extremely safe instruments, maybe like Treasury bills. The other 10% is committed to highly speculative products with potentially outsized rewards, perhaps options. It takes a lot of investing know-how and confidence to successfully deploy that strategy. I suspect that you might use some variation of Taleb’s barbell approach.
Not many investors can follow that course (that’s not me and I am definitely not referring to you). The problem is that many folks mistake luck for competence.
But I remain puzzled by the emphasis that you and others place on the fact that stock dividends fell below long term treasuries in 1957. Total annual returns are the pertinent measure of any investment’s anticipated value.
My only point was in reference to catch22's comment Anyone sure that this time isn't different??? and your subsequent comment about how "this time is different" type thinking can be a risky proposition. I don't necessarily disagree at all with your response. But there *have* been times in history when "this time it really was different". I was only 11 at the time but I still recall my father going on and on about this. As if this time it might really be different. And for the next five decades it was different.
Catch22 can correct me on this but I thought his point was maybe low rates are here to stay for longer than most expect. And this time it may once again be different with equity yields above bond yields like was the norm pre 1958. I am still not sure you understand where I am coming from on this. But that is what makes for discussion.
Typically when this trope appears it refers to a situation in some particular sector of finance which is suspected of being in the "bubble" mode. For example, internet/tech, housing, etc. The "this time" characterization is usually an attempt by the financial barkers to rationalize whatever particular short-term market distortion is taking place, and to convince the unwary that everything is just fine, not to worry, keep on buying.
Junkster appears to be considering a much more fundamental situation, regarding general long-term changes in the financial markets which can affect or change basic expectations in the overall operation of the financial markets. He interprets Catch22's question as a suggestion that just such a basic change may in fact be well underway.
I'm inclined to agree with both Catch and Junkster. I believe that the effects of the last short-term housing distortion were so devastating that they triggered a massive effort by central banks and other major financial regulators to restore market equilibrium and head off a full blown international depression. In this attempt previously untried regulatory and "guidance" maneuvers have possibly resulted in an unanticipated long-term change, the end effects of which are still really unknown.
It's interesting that at this point there are no barkers shouting "Step right up! Put your money here!" Evidently even the promoters and financial con men really have no idea of where this whole thing is headed. Time to be really careful, folks.
Typically when this trope appears it refers to a situation in some particular sector of finance which is suspected of being in the "bubble" mode. For example, internet/tech, housing, etc. The "this time" characterization is usually an attempt by the financial barkers to rationalize whatever particular short-term market distortion is taking place, and to convince the unwary that everything is just fine, not to worry, keep on buying.
Junkster appears to be considering a much more fundamental situation, regarding general long-term changes in the financial markets which can affect or change basic expectations in the overall operation of the financial markets. He interprets Catch22's question as a suggestion that just such a basic change may in fact be well underway.
I'm inclined to agree with both Catch and Junkster. I believe that the effects of the last short-term housing distortion were so devastating that they triggered a massive effort by central banks and other major financial regulators to restore market equilibrium and head off a full blown international depression. In this attempt previously untried regulatory and "guidance" maneuvers have possibly resulted in an unanticipated long-term change, the end effects of which are still really unknown.
It's interesting that at this point there are no barkers shouting "Step right up! Put your money here!" Evidently even the promoters and financial con men really have no idea of where this whole thing is headed. Time to be really careful, folks.
Old_Joe You read my mind and much more succinctly stated than my attempt. Thanks!
Thank you all for this stimulating exchange of ideas. I still fail to get excited about the potential long term penetration of the stock and 10-year Treasury dividend yield curves which hasn’t happened since 1957. Even if it does happen over an extended period, so what? Will it generate an apocalyptic market event?
I doubt it given the large array of other potential market disruptive elements that would have more direct first order impacts. I worry more about the unstable foreign situations, inflation rates, GDP growth rates, EPS statistics, and unemployment numbers. There are always a host of potential damaging factors that could operate to destroy our current and aging Bull market. So I agree with Old Joe; it is a time to be prudent and watchful.
One frequently applied statistical procedure to measure any impacts caused by any signal event is to test performance immediately before that event and performance after that event. In sports and in the marketplace, that’s easily accomplished since a ton of data is accessible.
The earlier referenced Stern school data summaries provide some imprecise comparisons. From that summary data, not much has changed since 1966. From 1926-2015, the S&P 500 returned 11.41% annually whereas the 10-year Treasury bond delivered 5.23% annually on average. From 1966-2015 those numbers have been recorded at the 11.01% and 7.12% annual average return, respectively. The relative rewards remain intact over the very long haul after the signal 1957 dividend penetration.
A more precise comparison can be accessed at the Research Affiliates website. Here is the Link to their more appropriate data sets:
In the 10-year 1951-1960 time period, equities delivered 16.3% annually while bonds produced a 2.1% annual return. Following the salient event, in the 1961-1970 timeframe, stocks returned 8.1% and bonds generated a 3.2% return. In the following 1971-1980 decade, stocks again outdistanced bonds by an 8.4% to 4.0% annual average margin. The specific numbers change, but stocks always bettered bonds in total returns. The 1957 event did not alter that general outcome. If it had an impact, it was minor in nature.
Why worry over the 1957 dividend penetration historical happening when more pressing current worldwide events are much more likely to influence near term market returns? Why worry the unlikely small stuff while ignoring the potential bigger stuff?
Once again, I thank all participants for this polite, well informed exchange. It was certainly worthwhile for me. Hopefully it served you well also.
MJG I think you missed my point. This has nothing to do with the *performance* of stocks vs. bonds. Just the unthinkable and this time it really was different as 1958 was a watershed event in that for the first time ever bonds yielded more than stocks.
The reason for the change in 1958 is being missed. There was a recession, stocks were coming off the effects of the Korean war AND European and Japanese companies were coming up. Don't forget that JFK faced a small recession and strikes for higher wages. Then bond yields went up in the 60s because of the Vietnam war and the beginning of the Great Society. Then add in the Brenton Wood agreement - called the gold standard - that required countries to use fiscal and monetary policies to manage exchange rate. Nixon wet off the gold standard - inflation, oil crisis and the 60s spending caused the 80's peak in bond interest rates.
The reason for the decline in the treasury interest rates in the 80/90s was in part due to the good economy that caused the worry to decrease. Now it is down because of it is a safe haven and deflation being more of a worry then inflation.
MJG, you noted: 1. "Your suggestion that “This Time is Different” rests on shaky grounds. Anyone who plays that investment style better have deep pockets and some evil desire to commit investing hari-kari. Deep pockets because it doesn’t happen all that often, and in the long run it is a Loser’s Game." and 2. "Perhaps it is different this time and outstanding bond returns will continue to challenge equities as your post suggests that as a possibility. I consider those long odds, and I do not accept that likelihood. Taking that position is dangerous; it’s a very long shot. Anyone who does accept that shot will be either a hero or a clown."
Not sure readers here will find clarity with the two bolds above, eh? I suppose the risk is the clarity. MJG, not picking on you; only referencing what you stated.
As I write this, I consider a new thread might be appropriate just for "this time is different, eh?" I've noted the "TTID" thought here several times since the market melt. I am not trained in any formal fashion to speak or write about this thought to be taken as serious or that I could fully prove what I sense. NOTE: We subject our investing to include, among other criteria, a reliance on memory(s). My retained or at least surface memory seems elusive too many times. I'm not one who can name a book and a page within which contains a particular quote. My brain plainly doesn't work this way. As long as this house remains active investors, I/we have to have our brains "into" the market places and outside influences, at a minimum of weekly observations, to help define pricing trends of the short, mid and longer terms. When the passion for this ebbs, VWINX or a similar fund will likely have all of the monies.
Rolling through my thoughts at this time are several item areas relative to investing at this house. ---technology ---central bank policy(s) ---demographics (baby boomers and the young with low education and low paying jobs) ---jobs/wage growth (being jobs of consequence, monetary) ---ongoing affects upon personal budgets since the market melt ---societal unrest ---pension funds, life insurance companies (many underfunded and scratching for returns.....as in hedge funds, alt. investments, etc.)
I'll comment only about technology, as related to labor force in the U.S. Technology will continue to negatively pressure the labor force in the U.S. relative to higher wages on a broad scale. As the U.S. currently remains a consumer driven economy, this will likely have a continued affect on GDP and many of the other measures used by the economic folks. This in turn may cause central banks to maintain an easy money policy longer than they choose. This may continue to affect those who don't trust or are not invested in the markets otherwise (boomers and their CD's). I suspect Ms. Yellen and associated folks just shake their heads on some days. Some of these folks are also relying on past charts, graphs and trends. This isn't necessary bad, but I hope they are also flexible and adaptable and not locked into past habits. 'Course there are a whole bunch of folks who haven't a clue to what may be taking place with their invested money. This same group will likely only be able to rely upon some of this money for their retirement future. If a "this time is different" lasts for 5 or 10 years or; investment returns will be affected. K. I'm too hot from outside work in a steamy Michigan environment right now. I'm going to quit this for now to cool the brain cells, as they may not be allowing me to express here properly. Not my best day for attempting to write concise thoughts. Thank you to everyone for prior comments.
I am in complete agreement with Crash, but I will not call him Puck as he suggested. The MFO contributions to this discussion have rightfully come full circle. That’s as it should be.
We do have a proclivity to wonder off topic. Often that does serve a useful purpose and it did in this instance. I believe this exchange went slightly off course several times but was still wonderful at exploring important other issues. The submittals contained both raw opinions and careful assessments. That seems to be the rule at MFO.
And that’s okay by my standards. Unlike Crash’s reference to the Stealers Wheel song “Stuck in the Middle with You”, at MFO we do not have “clowns to the left of me, jokers to the right of me”. MFO is populated by well informed investors with very precise positions. Our positions are not always right but we are infrequently stuck in the middle without some decision.
I assessed the article that Ted referenced as being heavily nuanced while failing to emphasize more influential factors. It was also failing to attract any significant readership on this site. So I opted to post a commentary that just might encourage a healthy set of replies. My purpose succeeded.
I am pleased with the diverse set of responses, most of which argued against my assessment. I felt the loneliness of the long distant runner. That too is okay by my standards.
Throughout my life experiences, I have formulated many minority positions and have composed many minority reports. That practice improved my abilities to defend unpopular positions. I thank you guys for allowing me to exercise that learning once again.
One lesson that I’ve learned from hard experiences is that the likely audience matters when preparing a presentation. The likely MFO audience is highly informed and highly motivated. You guys will not accept one-sided propaganda style presentations. So I typically try to include both pro and con elements to my submittals. Of course I weight the discussion to support the position I advocate. I also hope that you access my writings on a full satisfied stomach and are in a receptive happy frame of mind. That too helps to collect some support.
So we have come full circle. I’m fairly certain that I have not changed many minds on this matter. That's too bad. I’m now finished on this exchange. I anticipate we will share other such stimulating exchanges in the future. I look forward to them. It’s one primary reason why I visit MFO.
Once again, thank you all for your diverse and excellent postings.
Best Wishes for your continued health, wealth, and not being stuck in the middle.
"I suspect Ms. Yellen and associated folks just shake their heads on some days."
@Catch22- For sure. Ms. Yellin strikes me as one who is pretty resilient and one who keeps her eyes open. I'd be very surprised if she was proceeding with "head up and locked", as the old aviation saying goes. Frankly, very glad to have someone of her caliber at the controls.
I agree with your list of potential factors which may likely impact financial modes going forward. That's one hell of a lot of chickens looking for a place to roost:
---technology ---central bank policy(s) ---demographics (baby boomers and the young with low education and low paying jobs) ---jobs/wage growth (being jobs of consequence, monetary) ---ongoing affects upon personal budgets since the market melt ---societal unrest ---pension funds, life insurance companies (many underfunded and scratching for returns.
I suspect that future historians will regard the first quarter of the 21st century as a significant inflection point in the course of world history, as was much of the nineteenth century.
Comments
What nuanced nonsense! The article had many words, and just about zero new market interpretations. Change is continuous; that’s not an unexpected proclamation.
Change always happens, especially among various investment asset classes. It is an integral characteristic of the marketplace, and always has been.
This can be easily documented by simply visiting the Portfolio Visualizer website. One component of that site has a very comprehensive segment correlation section that does all the hard work. If you are so inclined, please give it a look-see-use tryout. Here is the direct Link to the asset class correlation portion of that resource:
https://www.portfoliovisualizer.com/asset-class-correlations
All a user needs to compare the dynamic nature of segment correlations is to input different starting dates. All the asset correlation coefficients are automatically calculated and even segment average returns and volatility are helpfully provided. It’s fun. Enjoy.
I do believe that the market returns have a strong pull to a regression-to-the-mean. Much market evidence supports that tendency. If several market segments are currently out-of-whack, these dislocations will be recognized by both professional and amateur investors, and there will be trading pressure to a reversion such that more normal outcomes will return.
To illustrate and for convenience, the 3-year comparison of the Vanguard Total Stock market ETF performance compared to the Vanguard Total Bond Market ETF serves well as a potential test of the regression hypothesis. The current outstanding 3-year bond results compared to overall stocks is anomalously high when contrasted against longer-term historical levels.
Check the relative returns of these two accessible Vanguard products over a longer timeframe, such as a 10-year period. I believe that the odds favor a regression-to-the-mean. The longer haul data suggests stronger future stock returns over present values whereas bond rewards will likely diminish. Time will be the ultimate arbitrator.
Personally, I’m not "stuck in the middle"; in reality, the article is a waste of good ink and space. I remain patient and await a return to the normal distribution and relative distribution of asset class returns. Their correlations will vary over time based on economic circumstances.
I’m not making major changes to my portfolio’s asset allocations. What do you think?
Best Wishes.
Thanks for reading my post.
Your suggestion that “This Time is Different” rests on shaky grounds. Anyone who plays that investment style better have deep pockets and some evil desire to commit investing hari-kari. Deep pockets because it doesn’t happen all that often, and in the long run it is a Loser’s Game.
I hope you were simply trying to encourage a dialogue.
“More money has been lost because of four words than at the point of a gun. Those words are ‘this time is different’.” That’s not me talking. It’s from a book authored by Professors Carmen M. Reinhart & Kenneth S. Rogoff who take a very militant stance against that proposition. They conclude that “When You Hear ‘This Time Is Different’ Don’t Walk, Run”. I haven’t read the book, but here is a Link to a review article:
http://www.economist.com/media/pdf/this-time-is-different-reinhart-e.pdf
Perhaps it is different this time and outstanding bond returns will continue to challenge equities as your post suggests that as a possibility. I consider those long odds, and I do not accept that likelihood. Taking that position is dangerous; it’s a very long shot. Anyone who does accept that shot will be either a hero or a clown.
Too many race track betters have been bankrupted playing the improbable long odds. That’s not my game. I am an investor not a gambler.
Best Wishes.
In a recent issue of his newsletter Economics & Portfolio Strategy, Bernstein recounted what it was like in 1958 when T-note yields -- for the first time in U.S. history -- jumped above the stock market's dividend yield:
"This ... was unprecedented. The two yields had come close in the past but had always backed away at the critical moment. In 1958, they reversed their historical positions and have never looked back.
Thank you reading my post and contributing to the discussion.
I was not immediately aware of the roughly 2 decade market timeframe starting in 1958 that you referenced in your reply. At that referenced date, I had only started investing a couple of years earlier. But my information shortfall was easily rectified.
I simply went to the Internet and linked to the New York University Stern school annual returns listing. Here is the Link to that nice data summary:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
Given the source, I presume this data package is accurate. I am not overwhelmed by the 10-year T. Bond returns over stocks even for that excellent period for the bond issues. The 10-year bonds did outperform stocks in 8 years of those 20-year annual periods. Even in that carefully selected timeframe, I doubt that the bond cumulative returns exceeded stock performance (I did not do the cumulative calculation).
But the Stern school did do both the arithmetic and geometric averages for the respectable 1966 to 2015 timeframes. From my perspective, that's a very meaningful period. For that extended time period the S&P 500 delivered 11.01% and 9.60% annual arithmetic and geometric returns, respectively. During that same period, 10-year T. Bonds produced 7.12% and 4.82% arithmetic and geometric annual returns, respectively.
Stocks win because they are risky and they generate returns both from dividends and price appreciation. It is certainly true that stock dividends have been contributing less to that total return than they did in the past. But the total return is what is most meaningful to me, and I suspect to many other investors.
This is not to say that fixed income is not a major portion of my portfolio. It is. Even at an age in excess of 80, I still have a 60/40 portfolio mix. Portfolios benefit from the diversification with low correlation coefficients between these two asset classes.
That portfolio split might be a tiny bit misleading since my wife and I both have social security and company retirement annual incomes. I count those as part of my fixed income segment since they are pretty secure with small incremental annual pluses. So the active portion of my portfolio is very heavily weighted in Equity and Balanced mutual funds.
Many thanks once again, and many good hopes for your portfolio management style. There are many ways to win at this game. Unfortunately there are many more ways to lose.
Best Wishes.
https://books.google.com/books?id=RvhGaqZ_oNUC&pg=PT143&lpg=PT143&dq=1958+bonds+yielded+more+than+stocks.&source=bl&ots=pixHXN0tvA&sig=YCDJlXuohSUBqPKwxYMT4ufgU7Y&hl=en&sa=X&ved=0ahUKEwjWosrL3IHOAhWFeSYKHU3XC5wQ6AEIMDAD#v=onepage&q=1958 bonds yielded more than stocks.&f=false
http://www.safehaven.com/article/14784/stocks-vs-bonds-5-decade-anomaly-returns
http://www.montereywealth.org/2012/06/14/stocks-yield-bonds/
It is indeed possible that I missed your point. I read and responded to your post after midnight, and that’s well beyond my normal bedtime.
But I remain puzzled by the emphasis that you and others place on the fact that stock dividends fell below long term treasuries in 1957. Total annual returns are the pertinent measure of any investment’s anticipated value.
I generally don’t sweat the finer details because bottom-line outcomes matter most. As an amateur investor, I frequently don’t know the finer details. If I did know those finer points, I would likely make errors in properly assessing them.
The data from the time period that you called attention to demonstrate the unpredictable volatility of various asset class returns. In 1960, bonds outdistanced the S&P 500 return by a whooping 11.64% to 0.34%. In the next year, a more conventional return to normal occurred. In 1961, stocks returned 26.64% while the 10-year treasuries delivered 2.06%. I doubt that very many market gurus projected these sudden changes; surely far fewer projected both outcomes.
The economic environment does change. But the public’s emotional reactions to the marketplace change far more quickly and unpredictably. As Phil Tetlock’s research proves time and time again, forecasting is a truly hazardous business. Repeat winners are rare birds.
Do you remember Elaine Garzarelli? She became a hero based on her accurate Black Monday call decades ago. Her subsequent predictions, however, were much less prescient. An analysis of her market predictions between 1987 and 1996 found her to be right only five out of thirteen times, But she’s a survivor. She is currently running Garzarelli Capital. Her predictions both then and now are based on a 13 factor model. Over time that model has been revised in terms of weightings on each factor.
Nobody can predict the future with statistical accuracy trustworthy enough to make major portfolio adjustments. As John Kenneth Galbraith said: “The only function of economic forecasting is to make astrology look respectable.” In his book, “Contrarian Investment Strategies”, David Dremen concluded that forecasters are wrong 75% of the time. Trust these charlatans at your risk.
In "The Black Swan," Mr. Taleb controversially recommends a "barbell" strategy. In that strategy, investors put 90% of their portfolios in extremely safe instruments, maybe like Treasury bills. The other 10% is committed to highly speculative products with potentially outsized rewards, perhaps options. It takes a lot of investing know-how and confidence to successfully deploy that strategy. I suspect that you might use some variation of Taleb’s barbell approach.
Not many investors can follow that course (that’s not me and I am definitely not referring to you). The problem is that many folks mistake luck for competence.
Thanks for the references.
Best Wishes.
My only point was in reference to catch22's comment
Anyone sure that this time isn't different??? and your subsequent comment about how "this time is different" type thinking can be a risky proposition. I don't necessarily disagree at all with your response. But there *have* been times in history when "this time it really was different". I was only 11 at the time but I still recall my father going on and on about this. As if this time it might really be different. And for the next five decades it was different.
Catch22 can correct me on this but I thought his point was maybe low rates are here to stay for longer than most expect. And this time it may once again be different with equity yields above bond yields like was the norm pre 1958. I am still not sure you understand where I am coming from on this. But that is what makes for discussion.
Typically when this trope appears it refers to a situation in some particular sector of finance which is suspected of being in the "bubble" mode. For example, internet/tech, housing, etc. The "this time" characterization is usually an attempt by the financial barkers to rationalize whatever particular short-term market distortion is taking place, and to convince the unwary that everything is just fine, not to worry, keep on buying.
Junkster appears to be considering a much more fundamental situation, regarding general long-term changes in the financial markets which can affect or change basic expectations in the overall operation of the financial markets. He interprets Catch22's question as a suggestion that just such a basic change may in fact be well underway.
I'm inclined to agree with both Catch and Junkster. I believe that the effects of the last short-term housing distortion were so devastating that they triggered a massive effort by central banks and other major financial regulators to restore market equilibrium and head off a full blown international depression. In this attempt previously untried regulatory and "guidance" maneuvers have possibly resulted in an unanticipated long-term change, the end effects of which are still really unknown.
It's interesting that at this point there are no barkers shouting "Step right up! Put your money here!" Evidently even the promoters and financial con men really have no idea of where this whole thing is headed. Time to be really careful, folks.
Old_Joe You read my mind and much more succinctly stated than my attempt. Thanks!
Thank you all for this stimulating exchange of ideas. I still fail to get excited about the potential long term penetration of the stock and 10-year Treasury dividend yield curves which hasn’t happened since 1957. Even if it does happen over an extended period, so what? Will it generate an apocalyptic market event?
I doubt it given the large array of other potential market disruptive elements that would have more direct first order impacts. I worry more about the unstable foreign situations, inflation rates, GDP growth rates, EPS statistics, and unemployment numbers. There are always a host of potential damaging factors that could operate to destroy our current and aging Bull market. So I agree with Old Joe; it is a time to be prudent and watchful.
One frequently applied statistical procedure to measure any impacts caused by any signal event is to test performance immediately before that event and performance after that event. In sports and in the marketplace, that’s easily accomplished since a ton of data is accessible.
The earlier referenced Stern school data summaries provide some imprecise comparisons. From that summary data, not much has changed since 1966. From 1926-2015, the S&P 500 returned 11.41% annually whereas the 10-year Treasury bond delivered 5.23% annually on average. From 1966-2015 those numbers have been recorded at the 11.01% and 7.12% annual average return, respectively. The relative rewards remain intact over the very long haul after the signal 1957 dividend penetration.
A more precise comparison can be accessed at the Research Affiliates website. Here is the Link to their more appropriate data sets:
http://www.researchaffiliates.com/Production content library/IWM_Jan_Feb_2012_Expected_Return.pdf
In the 10-year 1951-1960 time period, equities delivered 16.3% annually while bonds produced a 2.1% annual return. Following the salient event, in the 1961-1970 timeframe, stocks returned 8.1% and bonds generated a 3.2% return. In the following 1971-1980 decade, stocks again outdistanced bonds by an 8.4% to 4.0% annual average margin. The specific numbers change, but stocks always bettered bonds in total returns. The 1957 event did not alter that general outcome. If it had an impact, it was minor in nature.
Why worry over the 1957 dividend penetration historical happening when more pressing current worldwide events are much more likely to influence near term market returns? Why worry the unlikely small stuff while ignoring the potential bigger stuff?
Once again, I thank all participants for this polite, well informed exchange. It was certainly worthwhile for me. Hopefully it served you well also.
Best Wishes.
Regards,
Ted
Then add in the Brenton Wood agreement - called the gold standard - that required countries to use fiscal and monetary policies to manage exchange rate.
Nixon wet off the gold standard - inflation, oil crisis and the 60s spending caused the 80's peak in bond interest rates.
The reason for the decline in the treasury interest rates in the 80/90s was in part due to the good economy that caused the worry to decrease. Now it is down because of it is a safe haven and deflation being more of a worry then inflation.
https://en.wikipedia.org/wiki/Recession_of_1958
https://en.wikipedia.org/wiki/Recession_of_1960–61
MJG, you noted:
1. "Your suggestion that “This Time is Different” rests on shaky grounds. Anyone who plays that investment style better have deep pockets and some evil desire to commit investing hari-kari. Deep pockets because it doesn’t happen all that often, and in the long run it is a Loser’s Game." and
2. "Perhaps it is different this time and outstanding bond returns will continue to challenge equities as your post suggests that as a possibility. I consider those long odds, and I do not accept that likelihood. Taking that position is dangerous; it’s a very long shot. Anyone who does accept that shot will be either a hero or a clown."
Not sure readers here will find clarity with the two bolds above, eh? I suppose the risk is the clarity. MJG, not picking on you; only referencing what you stated.
As I write this, I consider a new thread might be appropriate just for "this time is different, eh?"
I've noted the "TTID" thought here several times since the market melt. I am not trained in any formal fashion to speak or write about this thought to be taken as serious or that I could fully prove what I sense.
NOTE: We subject our investing to include, among other criteria, a reliance on memory(s). My retained or at least surface memory seems elusive too many times. I'm not one who can name a book and a page within which contains a particular quote. My brain plainly doesn't work this way. As long as this house remains active investors, I/we have to have our brains "into" the market places and outside influences, at a minimum of weekly observations, to help define pricing trends of the short, mid and longer terms. When the passion for this ebbs, VWINX or a similar fund will likely have all of the monies.
Rolling through my thoughts at this time are several item areas relative to investing at this house.
---technology
---central bank policy(s)
---demographics (baby boomers and the young with low education and low paying jobs)
---jobs/wage growth (being jobs of consequence, monetary)
---ongoing affects upon personal budgets since the market melt
---societal unrest
---pension funds, life insurance companies (many underfunded and scratching for returns.....as in hedge funds, alt. investments, etc.)
I'll comment only about technology, as related to labor force in the U.S. Technology will continue to negatively pressure the labor force in the U.S. relative to higher wages on a broad scale. As the U.S. currently remains a consumer driven economy, this will likely have a continued affect on GDP and many of the other measures used by the economic folks. This in turn may cause central banks to maintain an easy money policy longer than they choose. This may continue to affect those who don't trust or are not invested in the markets otherwise (boomers and their CD's).
I suspect Ms. Yellen and associated folks just shake their heads on some days. Some of these folks are also relying on past charts, graphs and trends. This isn't necessary bad, but I hope they are also flexible and adaptable and not locked into past habits. 'Course there are a whole bunch of folks who haven't a clue to what may be taking place with their invested money. This same group will likely only be able to rely upon some of this money for their retirement future. If a "this time is different" lasts for 5 or 10 years or; investment returns will be affected. K. I'm too hot from outside work in a steamy Michigan environment right now. I'm going to quit this for now to cool the brain cells, as they may not be allowing me to express here properly. Not my best day for attempting to write concise thoughts.
Thank you to everyone for prior comments.
Our current investment mix: IG bonds = 52%, Equity = 48%
Bonds
---all investment grade U.S., corp. and gov't.
Equity sector breakdown
---direct healthcare related 44.6%
---U.S. centered 24.4% (blend)
---European 17.2%
---real estate 13.8%
Regards,
Catch
I am in complete agreement with Crash, but I will not call him Puck as he suggested. The MFO contributions to this discussion have rightfully come full circle. That’s as it should be.
We do have a proclivity to wonder off topic. Often that does serve a useful purpose and it did in this instance. I believe this exchange went slightly off course several times but was still wonderful at exploring important other issues. The submittals contained both raw opinions and careful assessments. That seems to be the rule at MFO.
And that’s okay by my standards. Unlike Crash’s reference to the Stealers Wheel song “Stuck in the Middle with You”, at MFO we do not have “clowns to the left of me, jokers to the right of me”. MFO is populated by well informed investors with very precise positions. Our positions are not always right but we are infrequently stuck in the middle without some decision.
I assessed the article that Ted referenced as being heavily nuanced while failing to emphasize more influential factors. It was also failing to attract any significant readership on this site. So I opted to post a commentary that just might encourage a healthy set of replies. My purpose succeeded.
I am pleased with the diverse set of responses, most of which argued against my assessment. I felt the loneliness of the long distant runner. That too is okay by my standards.
Throughout my life experiences, I have formulated many minority positions and have composed many minority reports. That practice improved my abilities to defend unpopular positions. I thank you guys for allowing me to exercise that learning once again.
One lesson that I’ve learned from hard experiences is that the likely audience matters when preparing a presentation. The likely MFO audience is highly informed and highly motivated. You guys will not accept one-sided propaganda style presentations. So I typically try to include both pro and con elements to my submittals. Of course I weight the discussion to support the position I advocate. I also hope that you access my writings on a full satisfied stomach and are in a receptive happy frame of mind. That too helps to collect some support.
So we have come full circle. I’m fairly certain that I have not changed many minds on this matter. That's too bad. I’m now finished on this exchange. I anticipate we will share other such stimulating exchanges in the future. I look forward to them. It’s one primary reason why I visit MFO.
Once again, thank you all for your diverse and excellent postings.
Best Wishes for your continued health, wealth, and not being stuck in the middle.
@Catch22- For sure. Ms. Yellin strikes me as one who is pretty resilient and one who keeps her eyes open. I'd be very surprised if she was proceeding with "head up and locked", as the old aviation saying goes. Frankly, very glad to have someone of her caliber at the controls.
I agree with your list of potential factors which may likely impact financial modes going forward. That's one hell of a lot of chickens looking for a place to roost:
---technology
---central bank policy(s)
---demographics (baby boomers and the young with low education and low paying jobs)
---jobs/wage growth (being jobs of consequence, monetary)
---ongoing affects upon personal budgets since the market melt
---societal unrest
---pension funds, life insurance companies (many underfunded and scratching for returns.
I suspect that future historians will regard the first quarter of the 21st century as a significant inflection point in the course of world history, as was much of the nineteenth century.
Take care- OJ