On the day of another move by the Federal Reserve designed to lower longer-term interest rates, it is worth taking a step back and looking at the stock and bond markets over the past decade or so.
If you're like us, you believe that we may be in the waning stages of a very long bull market in bonds. The yield on the 10-year Treasury note has gone from a high of nearly 16% in September, 1981, to an historical low of about 1.93% today. While the decline in rates has not been in a straight line, the trend has been incredibly consistent for the past 30 years. The reasons for the decline in rates is beyond the scope of this note.
Suffice it to say that the major cause is that investors have come to believe that we have slain the inflation beast which wreaked so much havoc when Jimmy Carter was in office. It remains to be seen, however, whether or not the beast has been laid to rest for good. Many very credible economists believe that the Fed's policies will act as Dr. Frankenstein and resurrect the beast in years to come.
Stocks, on the other hand, have been incredibly volatile over the past several years.
The ebbs and flows have been nauseating at times, but they have created opportunities for long-term investors along the way. However, buyers of the S&P 500 index in July 1998 have not seen their nest eggs grow by much over the past 12 years. The weak long-term returns and ceaseless volatility that have characterized the stock market over the first part of the new millennium have left a bad taste in investors' mouths. Many have sworn off stocks as they instead pile their savings into "safer" bonds and hard assets like gold. Is this the right thing to do at this stage?