Short Side Of Long: Stock Market Only Game In Town… For Now!
Chart 1: US stocks outperform Bonds and Gold by a large margin in 2013
Source: Short Side of Long
The chart above tries to do a decent job at presenting the basic returns in the Global Macro investment world of finance. S&P 500 represents equities, 30 Year Treasuries represent bonds and Gold represents commodities / hard assets.
A simple conclusion one can make is that one a three-asset preferred basis, equities have vastly outperformed bonds and commodities over the last 12 to 24 months. On an annualised basis, SPY ETF is up over 28%, while TLT ETF and GLD ETF are down 16% and 29% respectively.
Chart 2: One of the worst Gold vs Stocks mis-pricings in last few decades
Source: Stock Charts (edited by Short Side of Long)
Things become even more interesting when we compare these three assets on the relative basis. The ratio above is between Gold and Stocks. When the price is rising, Gold is outperforming and when the price is falling Stocks are outperforming.
The chart shows that the current relative under performance by Gold against Stocks is a huge 45% on annualised basis. This is the worst performance Gold has posted during a stock market rally since the early 1980s.
But… it is not only Gold but also Silver down 53% relative to S&P, Corn down 56% relative to S&P, Coffee down 45% relative to S&P, Wheat down 40% relative to S&P, Copper down 40% relative to S&P and so forth! The whole commodity sector is extremely oversold.
Chart 3: One of the worst Bond vs Stocks mis-pricings in last few decades
Source: Stock Charts (edited by Short Side of Long)
A very similar condition is also present in the Treasury bond market too. Bonds have under performed stocks by almost 32% over the last 12 months. The chart above shows the data going back to early 1980 and there has been only a handful of times Bonds have done even worse. Here is what happened during those dates:
In 1981 bonds became extremely oversold and rallied from their secular low
In 1987 bonds outperformed as the global stock markets crashed
In 2000 bond rallied but even more importantly stock markets crashed
In 2010 bonds rallied while the stock market went through a flash crash
The stock market is the only game in town… for now.
These types of under-performances can continue for awhile longer (and sometimes even end in a parabolic bubble), but eventually either bonds and gold will rally or stocks will crash very hard. It is one, the other or even more likely… a mixture of both.
One thing is for sure, it is hard to believe that stocks will continue to out perform all other asset classes indefinitely. As Chart One shows perfectly well, all assets take turns whether they are outperforming or under-performing, as liquidity constantly shifts from overvalued to undervalued assets. Contrarians tend to buy value in anticipation of a trend change, while trend followers chase momentum. Contrarians are usually early to the game, while trend followers are late leaving it.
As they frequently say in my favourite bar: pick you poison…
Link:
Short Side Of Long: Stock Market Only Game In Town… For Now!
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