Total Returns

Bobby Knight thought coaching would be perfect “if it weren’t for those damned games.”

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Before the markets punish an irresponsible act, they must first reward it.

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Bond investors residing in the Lower For Longer© camp no doubt feel vindicated by the summer rally that’s taken yields on 10-year Treasury bonds to as low as 2.06% in early September.

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Last year’s “low-risk” BUY signals from our Very Long Term (VLT) Momentum algorithm have proven very profitable, but enough time has elapsed that they should no longer be considered an important bullish factor.

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Buying the S&P 500 on one of the worst possible days in history ultimately yielded a total return of +87.4% (+6.8% annualized) through the end of April 2017...darn, sounds like an advert for Vanguard!

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Table 4 shows the annual sector selection and accompanying performance results for the Bridesmaid approach dating back to 1991.

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U.S. 10-Year Treasury Bonds—last year’s Bridesmaid holding—eked out a 1% gain in 2016, a disappointing result but one that preserved a streak of positive annual returns dating back to 2001 (Table 2).

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The turn of the calendar seems to bring out the inner contrarian in some investors—those who will peruse last year’s list of lagging asset classes looking for rebound candidates.

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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.

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In mid-summer we suggested that attaining new market highs would probably require a rotation away from the long-time Low Volatility market leaders and into High Beta areas like Technology and industrial cyclicals.

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Herein we further explore this month’s theme of “point-in-time relationships” and subsequent market returns. We review and update a study we initially conducted and published in June 2009.

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Based on comparative valuations alone, one could have made a case for investing in foreign stocks over domestic ones as early as 2010—when EAFE’s valuations sunk to an historical low, relative to the S&P 500. Today, that gap remains extreme.

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Hedge funds have shuttered by the dozen in the past few weeks, with the worst carnage among those focused on Emerging Markets and commodities. But the problem is broader.

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Three months ago, our “Of Special Interest” section reviewed the historically pronounced effect of the well-known “Sell In May” phenomenon during mid-term years of the presidential election cycle.

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Small Cap Premium Continues Upward To 23%. Large Caps Lead On The Downside In January

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Small Cap Premium Continues Upward To 21%. The red-hot equity market of 2013 was especially good for Small Caps with a +38.8% total return.

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Andy Engel revisits our Stock/Bond Performance Differential study which examines rolling stock/bond spreads over various time periods and subsequent asset class returns.  It appears that trends are finally reverting slowly toward the norm.

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Periods of accelerating inflation generally lead to lagging stock market performance.

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Don’t fear deflation. Leuthold historical studies show mild deflation can actually be a good environment for the stock market.

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Despite strong stock market returns relative to 10-year Treasuries, the “generational anomalies” still exist. Stocks should outperform bonds going forward.

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