Global stock markets, especially in the US, have made a furious comeback from the lousy start of the year. At its worst level the S&P 500 was down 11% year to date and 15% from its peak late last spring. At that nadir the market was trading at roughly the same level as November of 2013, over two years of gains wiped out by what appeared to be a nascent bear market. Since bottoming on the 11th of February, the S&P has traded up 13% and is now positive on the year, albeit a small gain. Has the bear been vanquished? Or is he just hibernating?

Despite that rally the market still trades at about the same level as November of 2014, a year salvaged from the lows. You could have collected 10 year Treasury coupons and made about the same as collecting the S&P dividend during that time, avoided the stock market volatility and be sitting on a capital gain to boot.  Over the last two years the returns from the 10 Year Treasury and the S&P 500 are not that dissimilar. The 10 year Treasury has produced a total return of about 11.25% versus the S&P 500’s 12.4%. When one considers the volatility of the stock market versus the bond market, the clear risk adjusted winner is the bond market. So, while the rally has been nice, it hasn’t been enough – yet – to change the math of a decision to remain bearish and underweight stocks.

So, despite the title of the post, it should have been pretty easy being a bear – if you made the decision to own longer duration bonds as an alternative. Of course, not many people have done that as, paradoxically, investors have been almost more afraid of bonds than stocks. I’ve been reading articles about a bond bubble for several years now and that talk pushed investors to the short end of the curve, scared to death that rates were about to spurt higher. This fear of higher rates also pushed investors into floating rate funds, junk and corporate bond funds. And wouldn’t you know it, short term Treasuries have been the worst performing part of the Treasury curve, floating rate funds are barely floating, junk took a big hit although it has made a decent comeback and corporate bonds have offered nothing over the coupon. Beware the consensus trade.

I’ve felt pretty good about how our portfolios have been allocated. We have had more duration in our bond portfolios than most and that has certainly helped and we took profits on the longest duration positions right near the top (see here). We did have a significant portion in TIPS though which only recently started to perform as inflation expectations finally picked up. We also had gold in our portfolios and that helped although you never have enough of the things that go up and always too much of the things that go down. On the stock side we’ve been underweight which has been good but overweight EAFE versus the US which has been bad. But with the dollar weak, I still think that’s the right call.