It’s No Different This Time

The Leuthold Group’s July Green Book takes an updated look at the 20-year trailing stock/bond differential:

As we’ve noted before, when ten-year Treasuries outperform stocks over long periods of time, it is a pretty rare condition deserving of attention. Historically, when this occurs it has been a pretty good time to buy stocks.

(Click to enlarge)

Since 1926, the stock/bond performance differential has fallen to negative on three occasions. In 1933, the differential dipped negative and stocks went on to deliver a +34% total return ACR over the next five years. However, ten-year Treasuries lagged substantially, turning in a much lower +4.6% ACR. The differential fell negative a second time in 1949. As before, stocks subsequently went on to deliver sharply higher returns in the ensuing 5-year period. The total return ACR in this five year period was +23% for stocks, compared to a meager +1.6% ACR from ten-year Treasuries.

It’s no different this time. Although five years have not elapsed since the differential plunged to a 62-year low, stocks have handily outperformed ten-year Treasuries in the nine quarters since then. Since Q1-2009’s low, the S&P 500 has turned in a +27.7% annual compound total return, while ten-year Treasuries have delivered a 1.4% total return gain on an ACR basis. It appears history is repeating itself once again.