“What’s gonna make you bearish?”
Hedge-fund manager David Tepper posed this question one morning five years ago, helping cement his reputation as a market sage. The “taper tantrum” was roiling equity markets world-wide, and futures were lower, but the founder of Appaloosa Management asserted in a CNBC interview that so much money was being pumped into the economy by central banks globally that taking refuge in zero-yielding safe assets was silly.
The S&P 500 rallied to close 17 points higher that day and has had a total return of 85% since then. An earlier “Tepper rally” after a similar TV appearance in September 2010 had seen the index jump and go on to gain nearly 60% by the time of his May 14, 2013, encore.
The phenomenon most responsible for the epic bull market now in its 10th year isn’t FOMO—fear of missing out—but TINA—there is no alternative. While there has been plenty of debate about exactly how unorthodox monetary policies like quantitative easing helped the economy, it is no mystery how they boosted stock prices. The lousy return on riskless assets such as Treasurys practically forced investors to pay up for riskier ones, as Mr. Tepper so presciently asserted.
The three-month Treasury bill, which has never offered a negative annual return based on data since 1928, saw its yield plunge from nearly 5% in early 2007 to zero by early 2009. As it essentially stayed there, the S&P 500’s annualized return between 2009 and 2017 was a whopping 15.2 percentage points higher than that of the bill.
It isn’t unusual for stocks to do better—they have trounced Treasurys in the long run—but the performance gap during the preceding 80 years had been a far more modest 7.3 percentage points. In other words, the opportunity cost of sitting on your hands was less than half as much. During 29 of those 80 years bills actually outperformed stocks by an average of nearly 15 percentage points.
With the cash-like instruments now yielding 1.93%, their highest since the collapse of Lehman Brothers, worrywarts can once again earn at least a bit of money on the sidelines. They may do even better than that in relative terms given the fact that stocks are now well into the most expensive decile of valuations compared to their long-run average when measured by Professor Robert Shiller’s cyclically adjusted price-to-earnings ratio.
Famed value investor Jeremy Grantham’s firm, GMO, published an updated seven-year forecast for the performance of various asset classes. It suggested that U.S. stocks would drop and return 3.7% less per year than U.S. bonds.
Mr. Tepper noted in January that he believed bond prices remain key to stock values and that, at that point, stocks looked “cheap.” But yields have risen meaningfully since then, while stock prices are at the same level. Mr. Tepper does seem to be diversifying, putting some $2.3 billion of his own money into an entirely different asset: the Carolina Panthers.
Could it be third and long for stocks?
Write to Spencer Jakab at firstname.lastname@example.org