JasonC

What Equity Risk Premium?

Both ideas are right for different reasons. The comment is correct that stocks are buys exactly at the moments when their past returns do not look attractive compared to bonds, and are sells at the exact moments their past returns seem to trounce bonds. (Measure to peaks e.g.). The other problem with the original analysis is that 1968 is an epic market peak in real terms, akin to measuring from the 1929 high.

But corporate bonds at present spreads are attractive compared to stocks. Treasuries aren't. You aren't going to get the past performance of treasuries that started at 9% yields and moved to 4% yields, starting from 4% yields. Mathematically impossible. But corporate spreads are at record levels.

The second reason is the place bonds actually shine is not in absolute returns, but in Sharp ratio. There is no reason to make a fetish of absolute returns, since for a given level of risk they are available in either asset class. If you can tolerate stock levels of risk, you can tolerate the risks in carrying bonds with 2 to 1 leverage, because they are the same. Bonds have an excellent historical Sharp ratio. Large cap value stocks and commercial real estate are the only other assets in the same league, even. Small value and large cap indexes aren't that far behind, but are behind those three.

You can do very well long term with a 50-50 mix of large cap value and corporate bonds, rebalancing to average in or out based on the relative performance, in contrarian fashion. With great robustness in period to period terms, etc.