The best of all worlds for investors?

October 12, 2009

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
this year.

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.

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With the U.S. Dollar descending, any stock gains made by small investors are greatly diminished, if not eliminated altogether.

What worries me is that homeowners who are already struggling to pay their mortgage bills will eventually lose their retirement money in the stock market.

Many times, an employee is given only a few mutual funds to choose from in a 401(k). What happens when he or she wants to sell? It’s not possible to liquidate the 401(k) or roll it over into an IRA at a brokerage account until after leaving a job. So, very few choices are left.

One possible choice is to go into U.S. Treasuries, but those are increasingly being shunned by other countries. They aren’t the safe haven that they used to be.

Is there no escape hatch for the American consumer?

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