Bill Miller opines on investor’s ‘perverse’ affinity for bonds over stocks:
This affinity for bonds over stocks is understandable when looking at the past 10 years, but perverse, we believe, when looking at the likely course of the next 10. Bonds crushed stocks the past 10 years, with riskless Treasuries returning more than 6 per cent per year, while stocks lost money on average each year of the past 10. Ten years ago stocks were expensive; now they are not.
In the next decade, the story is likely to be quite different. As the economy gradually (or quickly) recovers, the Fed will remove the extraordinary monetary accommodation it provided during the crisis, and shrink its balance sheet. A neutral Fed funds rate would be in the 2.5 per cent range or thereabouts, perhaps higher. Long term, the ten-year Treasury ought to yield about the nominal growth rate of GDP, so somewhere in the 4.5 per cent to 5.5 per cent range, leading to substantial losses in Treasuries and probably investment grade corporates as well. High-yield bonds ought to do better, but they had their big move last year, rising over 50 per cent and providing the best returns relative to equities ever. All this, though, assumes benign inflation of 2 per cent to 3 per cent. If the inflation bears are right, bonds will be a disaster. [Emphasis Added]
It is quite possible that asset allocations with inflexible exposure to bond funds could be in big trouble over the next decade.
