Not one but two charts for you in this piece, the first of which shows that, as its creators from Bank of America Merrill Lynch succinctly put it, the “world is long bonds, short equities”. Since 2006, $731bn (£453bn) has flooded into bonds of one kind or another while $566bn has flown out of long-only equities – a difference of $1.3 trillion.
$1.3tn spread between fund flows to equities and bonds since 2006
Source: Bank of America Merrill Lynch Global Equity Strategy, Bloomberg, 4 October 2012.
Now, we have expressed our continued amazement at the respective valuations of the two asset classes on many occasions and we will continue to do so as long as we believe that to be the case. Still, this time, let us try and match the Bank of America Merrill Lynches analysts for brevity and merely ask which asset has had a phenomenal 20 years and which one has had an awful 10 years? And what ever happened to buying low and selling high?
This second chart, also from Bank of America Merrill Lynch, plots long-term US treasury yields versus the performance of the Dow Jones Industrial Average Index to illustrate how the beginning of every great equity bull market of the last 100 years (the 1920s, the 1950s and the 1980s) has followed a sustained period of sideways movement and coincided with a major turning point – be it a peak or a trough – in bonds.
Dow Jones Industrials average and US treasury bond yields
Source: BofA Merrill Lynch global equity strategy, Bloomberg, haver, 4 October 2012
Now, you may or may not be a believer in the interrelation of such things but there is no denying equity markets have been moving sideways for more than 10 years while bond yields are at all-time lows. Maybe it is just a question of what individual investors consider a sensible timeframe for investing and, at present, many appear keener to benefit from any further short term tightening in bond yields than taking a longer term view on equities.
Yet if, on a five-year view, you can count on the direction of travel for a market with a reasonably high degree of confidence, why would you try and fine-tune the timing on that any further? Timing is such a hard thing to judge yet these days most people seem to want to bet on something that’s highly uncertain risking short term pain, rather that investing in something that’s significantly more likely, to make a long term gain. Go figure.