I started writing this note early yesterday before the wild market action prompted by heightened concerns about Russia potential invading Ukraine.
The purpose for the note was to address why we own Treasury bonds, especially considering that they are down simultaneously along with stocks for the year thus far and don’t seem to be providing any benefit.
Then stocks fell off a little cliff yesterday to lose about 2% on the day and Treasuries made around 1% thereby answering the question for me.
When clients log on to their portals a little later this morning after portfolio data has been updated through yesterday’s close, they’re going to see their portfolios held up quite well with some clients even making money on a day where stocks lost about 2%.
If we go back to 1928 and compare (thanks to Aswath Damodaran) the S&P 500 total returns with a constant-maturity 10-year Treasury Bond we find that both bonds and stocks had positive returns in the same calendar year 54 out of those 94 years, bonds and stocks had opposite returns in 37 of 94 of those years (with 2021 being the most recent), and both had negative returns in only 3 out of those 94 years. Treasuries and stocks are great diversifiers and complimentary assets.
The three years where BOTH bonds and stocks suffered negative returns simultaneously were 1931, 1941 and 1969.
In 1931, stocks were down almost 44% and 10-year Treasury was down just 2.6% for about a 42% spread so that’s just fine especially since consumer prices were falling almost 10% so the real return on Treasuries was positive even as the nominal return was negative. In other words, you had MORE purchasing power at the end of 1931 even though Treasuries lost 2.6% because consumer prices were falling much more (deflation).
Otherwise, besides those three examples, if stocks were down in a given year bonds were up and vice versa.
In some of those down years for stocks, you really wanted the Treasuries. For example, in 1930 stocks lost over 25% and 10-year Treasuries made over 4% for a 30% spread. in 1937 stocks were down over 35% and bonds were up about 1.5%. Throughout the Great Depression era (1929 – 1941), stocks lost about 35% while 10-year constant-maturity Treasury made almost 59% for a 94% cumulative spread!
In 1973 and 1974, stocks were down 14.3% and 25.9%, respectively, while bonds were up 3.7% and 2.0%! That’s a 36.5% decline for stocks in two years and almost 6% return for bonds for a 42.5% spread in two years.
From 2000-2002, stocks lost about 38% while bonds made 42% for an 80% spread in three years!
In 2008, stocks lost 37% and Treasuries made 18% for a 55% spread in a single year.
“It bears repeating that the S&P 500 lagged Treasury bills from 1929-1947, 1966-1985, and 2000-2013. 50 years out of an 84-year period.” – Dr. John Hussman, “Top Dollar For Top Dollar”
I believe that when stocks are in their next bear market (which they may already be), we could have a prolonged period where U.S. stocks lose ground and Treasuries actually make money as has happened in the past.
The point is that we own Treasuries to mitigate volatility and, more importantly, reduce portfolio losses that can jeopardize retirement goals and set portfolios back a decade or more. A month or two shouldn’t distract from a century of behavior.
Disclosures:
Past performance is no guarantee of future results. All investments maintain risk of loss in addition to gain.
Data from third-parties is believed to be reliable but accuracy is not guaranteed. Much of the data used to interpret the markets and forecast returns are often at odds with each other and can result in different conclusions. Many different factors impact prices including factors not mentioned here.
This is not investment advice but merely a general commentary. Individualized investment advice cannot be provided until a thorough review of your unique circumstances and financial goals is completed.
Views provided here are current only as of the moment of posting and are subject to change at any time without notification.
Data and explanations found here: http://people.stern.nyu.edu/adamodar/New_Home_Page/data.html
