Equities Will See Short-Term Volatility, But Treasury Yields Make No Sense

Stocks are likely to see continued volatility over the short and medium term, but are valued more attractively than bonds.
Current valuations for bonds are historically high compared to the rates on cash and inflation.
The upcoming bond bear market won't end with a bang, but with a whimper caused by high upfront valuations.
Inflation isn't that hard to create. I believe the Fed has full credibility in attaining its 2 percent annual inflation target.
The best moves are to wait for volatility to calm down before buying stocks and to think twice about investing bonds.
What's going on with the markets?
Equities experienced a historical selloff over the last week, with the S&P 500 down 12+ percent. Before, I modeled a 9.25 percent long-run annual expected return for the S&P, which has risen to 10.25 percent after the selloff (9.25 is a little below historical average returns, and 10.25 percent is in line). By the time you read this, the numbers could be higher or lower. I attribute the magnitude of the selloff to a reluctance of buyers of last resort to buy the dip and instead to wait until there's more information on the coronavirus. Historically, high net worth households are the main buyers after bear markets - due to the lower levels of leverage you see in many of those who already have significant wealth, they're able to take advantage of market declines in ways that hedge funds, broker-dealers, and proprietary trading firms often can't. Equity volatility is likely to remain elevated over the next few weeks to months, but over the long run, stocks are far more attractive than bonds.
One interesting piece of the market selloff is that my estimate for the returns of a typical 60/40 portfolio didn't change much over the course of the selloff. This is because the Treasury yields have plunged to near 1 percent per year, taking the entire spectrum of high-quality bonds with it. The price of certainty has risen to the point where after... Read more