We still can't feel as sanguine about our near- and medium-term economic prospects as traders (and the few remaining investors) appear to these days, but there's a powerful logic to "don't fight the tape"--let alone the Fed. Whatever the market's near-term prospects, when one takes a longer, multi-year view, this strikes us as a probabilistically attractive time to acquire equities.*
Two items caught our attention along these lines: Rob Arnott's much-discussed Index Universe piece on the relative performance of stocks and bonds in recent years. (We mentioned Arnott's research earlier this month.) As we argued in March, true bottoms tend to be marked by mass indifference, even revulsion toward stocks. In turn, one would expect that indifference to manifest itself in grinding, low-volume trading. But intelligent, sensible efforts like Arnott's can flash revulsion as well, not of the rash, emotional sort, but a kind of mean-reverting phenomenon in which the data Arnott cites, backward-looking by definition, are unlikely to repeat themselves. Take a look at Brett Arends' excellent coverage of this issue in Tuesday's Wall Street Journal:
"Starting any time we choose from 1979 through 2008," Mr Arnott writes, "the investor in 20-year Treasuries (consistently rolling to the nearest 20-year bond and reinvesting income) beats the S&P 500 investor." He argues the figures are even true going back to the late 1960s.
Mr. Arnott's article has generated quite a stir in the investment world, where he has, in theory, turned a lot of received wisdom on its head.
But American mutual fund investors, responding to last year's turmoil, are already voting this way with their wallets. So far this year they've withdrawn $45 billion from mutual funds that invest in the stock market, and put $68 billion into bond funds, reports the Investment Company Institute.
Should you follow suit? Not so fast.
Obviously bonds, especially Treasurys, held up well during last year's crisis. And they can make an important part of a portfolio, especially at the right price. But anyone hoping for a repeat of the last thirty years is probably dreaming.
The second item that leaped off the screen at us was yesterday's Journal story on financial advisers forsaking traditional buy-and-hold strategies rooted in asset allocation and Modern Portfolio Theory. We manage money in two styles, one traditional and strategic, the other (mildly) alternative and tactical. But we've been doing that since before the crisis, and when we see media coverage of rank-and-file advisors (and, implicitly, their clients) throwing up their hands in disgust at the supposed failure of traditional methods of portfolio construction, we can't help but think that this is a great time to have (or acquire) an inexpensive, diversified portfolio of global asset classes. To return, in other words, to the methods many people (professionals included!) can no longer abide. That's our kind of revulsion.
* Which, as always, implies no particular guesses about the short-term direction of the market.
Rob Arnott, "Bonds: Why Bother?" Index Universe, April 27, 2009
Brett Arends, "Bonds' 30-year Hot Streak Begins to Cool," Wall Street Journal, April 28, 2009
Anne Tergesen and Jane J. Kim, "Advisers Ditch 'Buy and Hold' for New Tactics," Wall Street Journal, April 29, 2009