Bonds Over Stocks

by: Roger Nusbaum

There was an article from Bloomberg that got a lot of attention the other day. The article itself was not earthshaking but it seemed like many people around the blogosphere weighed in on it. Such a broad topic "bonds outperformed stocks for a 30 year period for the first time since 1861" lends itself to a discussion that goes wherever you want it to go.

The last 30 years have had a couple of anomalies that played a role here. First is that interest rates went from the mid teens to the low single digits. Gains can still be had with bonds for people willing to buy here but yields would need to go back to the mid teens again before repeating the result of the last 30 years. The other anomaly is the (more than) decade-long round trip to nowhere for U.S. equities.

It certainly is possible that ten years from now we will be fiddling with SPX 1200-1300 although I do believe the market will grow but will lag many other markets and lag what we today think of as being normal returns.

This general topic has been one of the cornerstones of this blog since I started it in 2004 and my answer has always been to have more foreign equity exposure. This has been pretty simple in that from the broadest viewpoint possible the economic fundamentals and some of the excesses from the 1990s built a case early in the last decade for U.S. equities being relatively less attractive than many other countries. There was also a similar story for Western Europe and Japan.

Just from a casual observation "hey, things don't look so hot." As we sit here today late in 2011, I would again conclude that "things don't look so hot" for the U.S., Western Europe and Japan. That does not preclude those countries from having stock market rallies or even having seemingly prosperous decades.

It also doesn't take too much effort to figure out that for certain countries "hey, things look pretty good." It is fairly simple to understand if a country has something the world needs. Digging in a little more, I think understanding some of the basic dynamics of an economy are pretty simple as well.

This obviously is the top down process. It starts very simply and gets more involved the deeper you go. But figuring out the dynamics and prospects at the country level is in the wheelhouse of most people interested enough in the market to read stock market blogs. Investing in countries can be as simple as country funds but obviously big bets must be avoided and it would be wise to own countries with different attributes.

You can go deeper into individual stocks of course if you have the time and inclination but as we know from the the research done by Bespoke Investment Group, many markets had normal decades from 2000-2010 and that even if the U.S. flounders again in the new decade, there will again be plenty of markets that have normal decades.

As I wrote starting back in 2004 this type of work merely puts the odds in your favor. Long time readers will know the countries I've favored over the years and the ones I've avoided and the logic was simple then as it can be now.