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Equities Will See Short-Term Volatility, But Treasury Yields Make No Sense

Logan Kane profile picture
Logan Kane


  • Stocks are likely to see continued volatility over the short and medium term, but are valued more attractively than bonds.
  • Current valuations for bonds are historically high compared to the rates on cash and inflation.
  • The upcoming bond bear market won't end with a bang, but with a whimper caused by high upfront valuations.
  • Inflation isn't that hard to create. I believe the Fed has full credibility in attaining its 2 percent annual inflation target.
  • The best moves are to wait for volatility to calm down before buying stocks and to think twice about investing bonds.

What's going on with the markets?

Equities experienced a historical selloff over the last week, with the S&P 500 down 12+ percent. Before, I modeled a 9.25 percent long-run annual expected return for the S&P, which has risen to 10.25 percent after the selloff (9.25 is a little below historical average returns, and 10.25 percent is in line). By the time you read this, the numbers could be higher or lower. I attribute the magnitude of the selloff to a reluctance of buyers of last resort to buy the dip and instead to wait until there's more information on the coronavirus. Historically, high net worth households are the main buyers after bear markets - due to the lower levels of leverage you see in many of those who already have significant wealth, they're able to take advantage of market declines in ways that hedge funds, broker-dealers, and proprietary trading firms often can't. Equity volatility is likely to remain elevated over the next few weeks to months, but over the long run, stocks are far more attractive than bonds.

One interesting piece of the market selloff is that my estimate for the returns of a typical 60/40 portfolio didn't change much over the course of the selloff. This is because the Treasury yields have plunged to near 1 percent per year, taking the entire spectrum of high-quality bonds with it. The price of certainty has risen to the point where after inflation and taxes, you can expect to lose 15-20 percent of your money in real terms over a 10-year period by investing in Treasuries.

Contrary to popular belief, long-run stock returns are not completely mysterious, even if the inputs are constantly changing. Bond yields are even easier to model. The return you get over the life of the bond is the yield in the

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This article was written by

Logan Kane profile picture
Author and entrepreneur. My articles typically cover macroeconomic trends, portfolio strategy, value investing, and behavioral finance. I like to profit from the biases and constraints of other investors. Paywalled articles are available along with 1,000+ other authors by subscribing to Seeking Alpha Premium.You can read some more of my work for free here on my Substack.

Analyst’s Disclosure: I am/we are long SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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