Stocks vs. Bond ETFs: Will History Repeat Itself?

Historically, stocks and ETFs have outperformed Treasuries, but will history continue to repeat itself or will it be broken?

In this corner, we have bonds. In the other, equities. Advocates of both are squaring off:

• Equities have the ability to outperform bonds because they have the ability to double or even triple in price in a short time period. Advocates of equity, in particular “Wizard of Wharton” Jeremy Siegel, says that the stocks are the wisest asset to hold in order to build decent wealth.
• Advocates of bonds, such as PIMCO’s Bill Gross, say that bonds protect investors from terrible downfalls and that it’s virtually impossible for Treasuries to sink as low as stocks.

To put it into perspective, over the last 40 years large-cap stocks have returned 9.2% annually as compared to 8.5% for long-term government bonds. If one doesn’t consider the most recent market crash and the dot-com collapse, the gap is even larger.

So will this trend of a bond run-up continue? We can’t answer that, and there are many who are skeptical that it will. So far for the year, stocks have outperformed Treasuries. The reason behind this is that Treasury prices are being brought down as a result of the enormous outpouring of new Treasury obligations and that inflation might ensue, states Larry Light for The Wall Street Journal.

• iShares 7-10 Yr Treasury (IEF): down nearly 4.9% year-to-date with a yield of 3.91%

• iShares Barclays 20+ Yr Treasury Bond (TLT): down 17.7% year-to-date with a yield of 4.12%

Kevin Grewal contributed to this article.

Comments

[Vinz Klortho:]

Tom,

If you're going to ignore the dot.com crash and the 2008 crash, why not just eliminate any period where stocks did badly, and they will outperform bonds by even more?

Or are you saying that everyone should be a market timer and anticipate the larger downward moves in the market?

Vinz

Jul 10 03:26 PM

[Tom Lydon:]

Vinz,
I am saying that even if you do include the burst of the dot.com bubble and the most recent market crash, over the past 40 years equities have outperformed long-term government bonds by 0.7%.

Additionally, I am suggesting that investros should utilize a strategy when investing, more specifically a trend-following strategy. www.etftrends.com/2008...

-Tom

Jul 16 06:25 PM