The best of all worlds for investors?
Could it be that equity and bond investors are living in the best of all worlds at the moment?
Tim Bond, head of global asset allocation at Barclays Capital, has hinted that they might be. He says that history shows current conditions to be the best for both assets.
Since 1925, we find that in those years in which GDP was above trend and inflation below trend, U.S. equities have delivered an average 10.6 percent real return, with 20-year Treasuries delivering a 5.2 percent real return.
But this is not the number one scenario for either.
This is the second best return regime of the business cycle, beaten only by those periods in which both growth and inflation are below trend, the condition that has applied so far
Specifically, the findings were as follows:
Real annual returns, 1925-2008, U.S. assets
Real annual returns Pct
Equities Bonds Tbills
Low GDP, Low CPI 11.4 10.1 2.8
High GDP, Low CPI 10.6 5.2 1.3
High GDP, High CPI 8.2 -1.2 -0.9
Low GDP, High CPI -1.9 -5.0 -1.7
The highs and lows are calculated based on trends over time with Bond estimating that current U.S. trend growth is about 2.3 percent and trend inflation 2.3 percent.
Reuters polls project the U.S. economy to contract by 2.6 percent annualised this year and to grow 2.2 percent in 2010. Inflation is seen at -0.5 percent and 1.8 percent, respectively.