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CHAPEL HILL, N.C. — What if T-bills are your best bet for performance over the next decade?
I'm sure you think I'm kidding. T-Bills currently are yielding just 0.075%, or just $7.50 for every $10,000. That's the best I can do?
Take the stock market, which is at all-time highs and already-rich valuations. What are the chances it will provide handsome returns over the next decade?
The indicator that has perhaps the best record at predicting 10-year returns is the infamous Shiller P/E, named for Yale University professor Robert Shiller, who just recently was awarded the Nobel prize in economics. The data below are from an article written by Cliff Asness of AQR Capital Management, based on data back to 1926.
|Decile of Shiller P/E at beginning of 10-year period
||Bottom of Shiller P/E range for this decile
||High end of Shiller P/E range for this decile
||Average S&P 500 real return over subsequent ten years
|1 (stock market cheapest)
|9 (where we are today)
|10 (stock market most expensive)
The current Shiller P/E is 24.4, which puts the market in the 9th decile. On the assumption that the future is like the past, the market's expected real return over the next decade is just 0.9% annualized.
Of course, as stock market bulls like to remind us whenever these data are presented to them, the alternatives are hardly any better. All it will take for bonds to produce a loss in real terms over the next decade will be for interest rates to rise even modestly.
But this argument doesn't really support the conclusion the bulls draw. Just because the alternatives are awful doesn't mean the stock market is a good place in which to invest your money. T-Bills are not an unattractive option if you think stocks are overvalued and interest rates are about to rise and cause bonds to suffer.
For example, what if the period in U.S. history most analogous to where the financial markets are currently was the beginning of 1966? The accompanying table, from Ibbotson Associates, a division of Morningstar, shows what happened from then until the end of 1981, 16 years later.
|Annualized total return 1966-1981 (nominal)
||Annualized total return 1966-1981 (real)
|S&P 500 (.SPX)
|Long-term Corporate Bonds
|Long-term Government Bonds
|Intermediate-term Government Bonds
|90-day Treasury bills
Notice that over this 16-year period T-Bills provided the best inflation-adjusted return of either stocks or bonds.
What about gold? It produced a 15.4% annualized nominal return over the 1966-81 period, or 8.4% in real terms. But note carefully that gold's price was fixed at $35 an ounce until the early 1970s, just as it had been for many decades prior. So it's likely that a large portion of its huge gain in the latter half of the 1970s was caused by pent-up demand from earlier decades.
To be sure, researchers have found that gold is a decent inflation hedge over the very long term. But, as I argued in a column this summer, that long term has to be measured in many decades, even as long as a century. Over shorter periods of up to a decade or two, gold has a poor record as an inflation hedge.
T-Bills may not be exciting, but they do have two things going for them. They don't fluctuate very much in value, so their returns are assured. And their yield rises more or less in lockstep with inflation.
We can all hope that we can do better than merely keep up with inflation over the next decade. But, I shouldn't need to remind you, hope is not a strategy.
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