In Memoriam: Transitory, and There Is No Alternative
Part II of Volume I, Issue VI
So far 2022 has been a year where just about everyone on Wall Street got it wrong. As did the Fed and a cadre of global central banks. Back in December, strategists at the world’s top investment firms like JPMorgan Chase & Co. predicted the S&P 500 would gain 5% in 2022. Economists saw the U.S. 10-year Treasury yield hitting 2% on average by the year’s end. And even Goldman Sachs Group Inc. lent credibility to the claims Bitcoin was on track to hit $100,000.
Yet six months later, an unprecedented confluence of shocks has ended one the most powerful equity bull markets and sent safe-haven government bonds and other assets spiraling. The market has quickly turned from “buy everything” to “sell everything,” with the multiyear “there is no alternative” (TINA) phenomena in equities now gone. Unforeseen events including the Russia-Ukraine war have contributed to the highest consumer prices in 40 years. And as a result, ultra-low interest rates and monetary stimulus -- essentially the foundation of the post-pandemic rally -- have evaporated as the Fed and its counterparts have sought to quell inflation.
Even Jerome Powell didn’t see the turbulence that was coming from inflation. He expected price gains to decline to levels closer to the Fed’s longer-run goal of 2% by the end of 2022. But now bond markets are flashing recession signals as the Fed’s aggressive rate hikes pose a risk to the economy’s growth.
- Bloomberg, June 18, 2022
Editor’s Note: This is Part II of Volume I, Issue VI, of The Macro Value Monitor. Part I, Missing the Forest for the Trees in the Early Months of a Long-Term Bear Market, can be found here. A PDF version of the Macro Value Monitor is also available.
When Benjamin Roth began his diary in the summer of 1931, many familiar names on the New York Stock Exchange were trading at astonishingly low prices. Youngstown Sheet & Tube, the namesake corporation of Roth’s hometown, situated at the heart of steel production in North America, had lost three-quarters of its market value in less than two years. But as terrifying as those losses were, the press was full of articles arguing that the low prices at that time represented an outstanding opportunity to get into stocks, especially amid the assurances from economists and politicians of the imminent arrival of economic recovery.
Yet two decades later, in June 1952, the real price of the S&P 500 was still below the level it was when Roth began writing in June 1931. The total return during those intervening years from holding stocks was positive, barely so, but that positive return was due entirely to received dividends, not capital gains; fortunately for investors at the time, the dividend yield of the S&P 500 was 6.5%, and it would average 5.7% over the following twenty years. This robust dividend yield enabled those who invested in stocks to eke out a positive return between 1931 and 1951, but the real value of an investor’s equity portfolio suffered terrible declines throughout that period. As late as 1949, a broadly diversified portfolio of stocks remained less than two-thirds of its starting real value in June 1931.
As cheap as stocks seemed when Roth began his diary, over the course of the next twenty years they became much cheaper. This kept a lid on total returns until the 1950s. What is astonishing is that nine decades later, throughout the year 2021, investors – professionals and non-professionals alike – had thoroughly convinced themselves that there is no alternative to investing in stocks, despite market valuations that were far higher than in 1931, and higher, in fact, than at the peak of the market’s exuberance in 1929.
In the wake of there is no alternative in 2021 has come there is nowhere to hide in 2022. As was detailed last month, the combined yield of stocks and bonds hit a record low in last year, and the underlying, cyclically-adjusted yield of the standard 60/40 portfolio ended 2021 just above that record low, at 2.14%. As that miniscule yield has climbed above 3% in 2022, it has resulted the steepest first-half losses for stocks and bonds since 1970, and a larger quarterly loss than during either the pandemic panic in 2020 or during the financial crisis in 2008. In terms of its short-term impact, the end of the era of ultra-low yields has represented a greater risk to investors than either a global financial crisis or a global pandemic.
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