In recent weeks, we’ve seen the “sell-side” investment community get about as cautious as it ever gets, recommending investors to “trim risky holdings on ‘up’ days” and “stay diversified.” However, these cheerleaders’ idea of diversification is usually to hold more equities in different sizes and styles.
The past 26 months have been wild ones for equity investors, but one could have essentially matched the S&P 500’s healthy return of +18.1% with a portfolio that was evenly split between the “fear” assets of Treasury bonds and gold. REITs have been solid, too, but EAFE and the Russell 2000 are now both total return losers since the beginning of 2018.
Here are the historical annual performance results for the hypothetical Bridesmaid strategy.
It’s no surprise that U.S. Large Caps were the #1 asset class performer in 2019. We were surprised that last year was the only one of the decade in which the S&P 500 won the annual performance derby. Here we review the annual performance of “Bridesmaid” asset class and sector, “Perfect Foresight,” and Lowest P/E sector.
Yields on 10-year Treasury bonds have still not breached the 3.00% level that many believe will stick the proverbial “fork” in the secular bond bull market that began in 1981. That could well in happen in the next few weeks, but we believe it’s important to step away from the daily fray and reflect upon the damage that’s already been done.
While a plunge into a recession could always result in a final “blow-off” phase to the 35-year secular bull market in bonds, any youthful, long-term buyer of 10-Year Treasurys should weigh that exciting possibility against the odds that bonds do no more than match the inflation rate over the next 30-50 years.