When stocks go _____, bonds go _____

What is the relationship between stocks and bonds?

The only real answer is context-dependent – What else is going on around us?

Or, we can simply reply “it depends on the decade.”

What makes running a macro strategy so lucrative for professional investors and fund managers is the fact that there is no black-and-white answer to questions like these, hence the enormous reward for getting it right.

Ben Carlson tackles this issue in a larger post about the lack of precision in investing. His table, a look at the performance of stocks and bonds by decade, going back to the 1930’s, is below:

The interplay between asset classes are always changing and evolving depending on the current economic or investment cycle. And no two cycles are ever the same which keeps things interesting.

Looking back at the long-term historical performance of stocks and bonds shows how these relationships can change over time. Here are the annual returns for the S&P 500 and 10 year treasuries by decade through the end of 2013:

bonds stocks

Josh here – Markets are a complex dynamic system acted upon by millions of different agents (you and me) and millions of variables. Not only can we not appropriately weight the impact of the key variables (economic growth, tax law, geopolitics, climate, cultural shift, demographics), we can’t even rely on these impacts manifesting themselves in the same way each time. It’s like trying to carry out a physics experiment where the basic Newtonian Laws change themselves around at random intervals without warning!

As a result – and as Ben likes to remind us – no two cycles are ever exactly the same. This is why portfolio management is nothing like building a motorcycle, but rather a lot like riding one on a strange, new route*. There are basics as far as how we should comport ourselves, but no specifics about what’s to come ahead.

Be wary of people with simple answers to complex questions.

The historical relationship between stocks and bonds is varied. The future relationship will not be consistent and, as such, will be unknowable for as far as the eye can see.


There’s No Such Thing As Precision When Investing (A Wealth of Common Sense)

*Hi, Norm! 

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