"It’s The Economy, Stupid." Not According To Aggressively Allocated Stock Investors

US Versus Europe And Japan


At the same time, U.S. treasury bonds have actually provided a better risk-adjusted return than stocks in 2016. With the 10-year yield shedding 75 basis points from roughly 2.3% to 1.55% and realized volatility of 5, the Sharpe ratio for treasury bonds comes in at 1.5. Stocks? 0.6. One can visualize the asset classes by looking at proxies such as iShares 10-20 Year Treasury Bond (TLH) and the S&P 500 SPDR Trust (SPY).



Now here is a sobering thought: What if the U.S. is in the process of turning Japanese? In particular, our longer-term economic growth began slowing considerably about eight years after Japan (2000 versus 1992). And the Federal Reserve began the process of buying market-based securities with electronic money (a.k.a. “quantitative easing” or “QE”) about eight years after the Bank of Japan (BOJ) to stimulate the U.S. economy.

Consider Japanese equities in its chart since 1992 once more. Obviously, it has been an exceptionally disappointing run since the “Land of the Rising Sun” combined sloth-like economic growth with ever-increasing debt obligations.



Less obvious? Since the U.S. began traveling a similar path as Japan in 2000, U.S. stocks have been able to amass unrealized nominal gains of around 47%. Perhaps ironically, an average bear market in history is roughly 33%. That’s about the same percentage that would take U.S. stocks back to 0% nominal gains for the 21st century.

$SPX 2016


No, the U.S. is not Japan. That said, we’re facing the same types of systemic challenges. Anemic economic growth. Unmanageable debt levels that require terminally low interest rates to even contemplate servicing the interest payments. Some investors even see the same types of deflationary pressures that have plagued the rest of the developed world.

Again, let’s go back to 2000. Rarely does one find a moment where investor expectations for inflation came in lower than the inflation data itself. Yet that’s what is taking place.

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Disclosure: ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered ...

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