The outperformance of the recent IPO of Beyond Meat (BYND), even after its secondary announcement, has been well documented over the last several weeks, but have you seen the performance of bonds?  The chart below shows the total return of the S&P 500 compared to long-term US Treasuries over the last year.  How many times in the last few weeks have you heard about how the rally in stocks has gotten way too far ahead of itself and is reminiscent of the late 1990s?  We’ll concede that 2019 has been an exceptionally strong year for equities so far, but over the last year, the S&P 500 is up less than 8% on a total return basis.  Meanwhile, long-term US Treasuries are up over 14%!  That’s nearly 80% more than equities. So, if stocks are a bubble what are bonds?

The chart below compares the one, two, five, ten, and twenty-year annualized returns for the S&P 500 going back to 1928.  The S&P 500’s performance over the last year is actually well below its historical average of 11.7% and ranks in just the 39th percentile relative to all other 12-month periods.  While two and five-year returns are both just modestly above their historical average and rank in the 52nd and 51st percentiles relative to history, the S&P 500’s ten-year annualized return is well above average (14.0% vs 10.4%) putting it in the 65th percentile relative to all other periods.  Keep in mind, though, that ten years ago was just four months removed from the financial crisis lows.  Expanding our window out to 20-years, the S&P 500’s current returns relative to average start to fall off a cliff again.  The 6.1% annualized return is almost five full percentage points below the historical average of 11.0% and ranks in just the 4th percentile relative to all other 20-year periods.  Continuous underperformance of almost five percentage points per year really starts to add up over time.  For example, while a 6.1% annualized return over a 20-year window translates to a total gain of 227%, an 11% annualized gain over that same time period works out to a gain of 706%!

While equity market returns have been well below average over the last year, bonds have performed extremely well relative to average.  At 14.1%, the one-year total return is in the 72nd percentile relative to all other one-year periods.  However, for every other time window (two, five, ten, and twenty years) returns have been consistently below-average ranking well below all other periods on a percentile basis. Keep in mind here, though, that unlike total return data for equities which goes back to the late 1920s, the total return series we used for Long-Term US Treasuries (Merrill Lynch Long Term Treasuries Index) only goes back to the mid-1970s.Start a two-week free trial to Bespoke Premium to receive our best equity research on a daily basis.

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