As we close out another Memorial Day weekend, I submit the usual weekly summation, with the biggest positive being, "All things considered, this week could have been much worse than it was ... That resiliency is the biggest positive no one is talking about." The bonus to end this holiday is another quite interesting study from the AAII which, though it states the obvious that, in the long run, equities beat fixed income every time, I'm not sure if we've ever before seen a study that takes us all the way back to 1802 to make its point. It is really quite fascinating looking at the trends over two full centuries and seeing how relatively consistent they have been.
A second bonus is a very interesting graphic from the World Bank showing that as global wealth has so strongly increased since the 1980s, so too global poverty has also proportionately decreased in that period. I would love to see the detailed analysis behind that graph. Hope everyone had a great holiday.
Succinct Summation of Week’s Events 5.24.19
Succinct Summations for the week ending May 24th, 2019
Positives:
1. All things considered, this week could have been much worse than it was… That resiliency is the biggest positive no one is speaking about.
2. Jobless claims fell 1k in May from 212k to 211k.
3. Home mortgage refinance apps rose 8.0% w/o/w, above the previous 1.0% decrease.
4. New home sales had upward revisions of 39k in the previous two months.
5. Natural gas in storage rose 100 billion cubic feet, increasing for the 8th straight week.
Negatives:
1. Trade War continues to be a drag on economic activity and sentiment. By end of next week, ships with Chinese goods will hit our ports be subject to 25% tariffs — up from 10% now.
2. Same store sales rose 5.2% w/o/w, decelerating from previous 5.4% increase; Durable goods orders fell 2.1% m/o/m, below the previous 1.7% increase.
3. PMI composite came in at 50.9 for April, below the expected 52.4.
4. New home sales fell 6.9% m/o/m from 723k to 673k; Existing home sales came in at 5.190M for April, lower than the expected 5.350M.
5. Home mortgage apps decreased 2.0% w/o/w, lower than the previous 1.0% decrease.
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| Equity vs. Fixed Income: Return Patterns Since 1802 |
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 As investors, we are bombarded with statements that, in the long run, stocks outperform all other asset classes. That is the cornerstone of equity investing. Over shorter periods, stocks may lag other assets, such as bonds, but nothing tops the long-term performance of stocks.
Even as we are being confronted with these statements, and even if we truly believe them, there are periods when the markets test that faith. The most recent example of this was the market slide of 2008–2009. I don’t blame people who pulled out of the market as stocks fell 50% and more (but I don’t agree with it). I don’t believe in market timing and those who may have gotten out and saved their portfolio from a significant downturn may have also missed the strong market rebound that started in March 2009.
For my money, investing fully in the market and for the long term is the way to go. And the article Equity vs. Fixed Income: Return Patterns Since 1802reinforces that sentiment. Professor Jeremy Siegel, author of “Stocks for the Long Run,” penned this article for the June 1992 issue of the AAII Journal.
While the data in the article is through 1990, the conclusions Siegel reached are very important to keep in mind, mainly:
- Inflation has a serious negative impact on real returns in the long run
- Capital gains taxes should play a role when estimating your future returns
- Stocks outperform bonds, especially in low-interest-rate environments
 Siegel makes special note of the decline in the real return on fixed-income instruments (sound familiar?). Not only has this forced investors to rely more on equities to achieve their desired returns, but the fall in bond real returns has been the key driver of the equity risk premium, not the rise in return on equities.
No matter how you slice the data, stocks outperform bonds in the long run. While in our hearts we undoubtedly know that, it’s always a good idea to get a refresher. You’ll find just that in the article Equity vs. Fixed Income: Return Patterns Since 1802.
Stay tuned: Tomorrow I highlight an AAII Journal classic from 1988 covering 10 common mistakes made by mutual fund investors well before “behavioral finance” became popular.
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| Equity vs. Fixed Income: Return Patterns Since 1802
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