“One by one the voices silenced, for they know that time will tell, it’s time that wears the crown, and time that rings the bell," Peter Gabriel, Playing for Time
Source: Dimson, Marsh and Staunton, London Business School; Vanguard; MKAM.
Since the Federal Reserve finally ended their zero interest rate policy (ZIRP) after 13 years, bond expected returns are back to normal. Shot-term 3-month Treasuries are paying more than their historical average. 10-Year US Treasury bonds took longer to catch up but are now exactly in line with their historical average.
Source: US Treasury and MKAM.
Stocks remain the outlier, priced for the old world, where investors had to take risks to generate returns.
Stocks fell nearly -25% from the end of 2021 through the fall of 2022, as the stock market priced in higher rates. But, markets have learned to buy the dip after the sharp recovery that occurred after the quick Covid drawdown and recovery. The S&P 500 sits only -6.6% below it’s closing value on December 31, 2021, when the return on cash was 0%.
Most likely, the only element needed for stocks to fall and, thus, expected returns to rise is time. Jeff Gundlach made apropos comments at Future Proof last month, in Huntington Beach, California:
“In the world of predictions and in the world of finance and investments there’s one thing I’ve learned. You can sort of divine a little bit what the future might look like but the timing of it is really, really hard. And as a general rule everything takes longer to happen than you think it will. Everything takes forever. People are impatient… you know what the trend’s gonna be, but you don’t know when it’s gonna happen.”