Stocks are riskier than bonds — everyone knows that. At least until this year. So far in 2022, long-term U.S. Treasurys have significantly underperformed U.S. stocks. The Vanguard Long-Term Treasury ETF
is sitting on a more-than-30% year-to-date loss, for example, versus a 23% total-return loss for the S&P 500
Is this year’s performance the exception that proves the rule? Or might the conventional wisdom about bonds be a case of what Humphrey O’Neill — the father of contrarian analysis — liked to tell his clients: “When everyone thinks alike, everyone is likely to be wrong.”
One telling piece of evidence suggesting that bonds might be riskier than stocks comes from recent research by Nicholas Rabener, founder and CEO of FactorResearch in London. He calculated the largest cumulative inflation-adjusted drawdown since 1928 for each of several asset classes. Ten-year Treasurys had the worst, at 61%. The S&P 500, in contrast, came in at 52%.
Rabener’s research would be of crucial importance at any time, but especially in light of this week’s report of worse-than-expected U.S. inflation. Treasury yields across the maturity spectrum rose in the wake of the news, translating to across-the-board bond-market losses. The S&P 500, in contrast, rose strongly.
Negative real return for long periods
Rabener’s statistic is not the only one that suggests bonds may be riskier than most of us think, both in absolute terms and relative to stocks. Another is how long the various asset classes historically have remained underwater in inflation-adjusted terms. According to Credit Suisse’s Global Investment Returns Yearbook, U.S. government bonds took the the longest to recover — 57 years.
According to the yearbook’s authors — Elroy Dimson, a finance professor at Cambridge University; Paul Marsh, a finance professor at the London Business School; and Mike Staunton, director of that institution’s London Share Price Database — U.S. government bonds produced an inflation-adjusted loss between 1924 and 1981. For U.S. stocks, in contrast, the longest period since 1900 over which they produced a negative real total return was 16 years.
It really shouldn’t come as a huge surprise that long-term Treasurys have produced a bigger loss this year than the S&P 500. It’s happened before. But bear markets have a way of teaching us the history we have been overlooking. As Rabener puts it, “Investors need to rapidly change their perception of bonds.”
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at firstname.lastname@example.org