While I am cautious on equities as an asset class. believe me. there is a level on long-term bond yields at which there is no room to move lower and at that level we will likely see a broad asset allocation shift towards equities which is exactly what the central bank wants to see: A revival in risk appetite. wealth creation and animal spirits. Now there are slices of the equity market that I do like: income equity in noncyclical sectors as an example and the mining stocks offer deep value too. But as an asset class. sorry. the truth of the matter is that being “bearish” has worked because outside of the short-lived and bounces. there has been absolutely nothmg gorng on the major stock market indices. The S&P 500 is no higher today than it was on February 1st, 2011. Do you know what that means? It means that 100% of the cyclical bull market off the March 2009 lows ended more than 16 months ago and we have no shortage of market commentators who cling to the view that we are still in a bull phase!! Not only that but the S&P 500 is at the same level was at on March 1999 more than thirteen years of nothing except the rernvested drvidend. And that reinvested dnvidend is what we remain focused on for the most pan.
All that said, and with the aim of leaving the dogma at the door and being completely flexible and open-minded, I have said time and again that the secular bull market in bonds ends with the 10-year T-note yield at 1.5% - with a chance of a blowoff to 1-1.25% to be sure but no need to get greedy - and the long bond down to 2% (where it was more than 70 years ago). We are getting close, but no kidding. we aren't there just yet. What investors who myopically look at yield (oh... rates will rise eventually they say... that's right, sometime in 2015) is that the total return on long bonds, if the assumption of ‘mean reversion' to the Treasury curve applies (the historical spread between long bond yields and the Fed funds rate is less than 200 basis points), would approach 15% in the next year. As an aside, Bloomberg reports that PIMCO's Bill Gross is adding to Treasuries for the first time in four months...
---Vitus emphasis
No comments:
Post a Comment