Stocks vs. bonds: The Japanese argument

by Michael Tarsala, CMT

There are technical reasons to think stocks could outpeform bonds in coming months, as well as the long-term one that still gives the slight edge to stocks.

Portfolio manager and World Beta Blog author Mebane Faber suggests that Japan offers the best comparison for what may happen to U.S. Treasury yields in the years ahead.

Source: World Beta Blog

Above is Faber's chart of Japan's 10-year Treasury, in blue. And in red is U.S. Treasury yields plotted 10 years forward. That is, the U.S. series begins in 2000 when the Japanese series is at 1990. It makes the case that 2% U.S. Treasury yields are certainly not a floor, and that the yields may continue to lag in the decade to come.

It begs the question: How did Japanese stocks fare the past 10 years, relative to Japanese Treasuries?

Sources:  Yahoo Finance, and European Central Bank

It's not promising at all: Neither did well at all over the long-haul over the past 10 years.

But even in Japan, which has faced a deflationary environment, multiple global shocks, plus a tsunami and nuclear disaster, the Nikkei (in orange) outperformed Treasuries (in blue) over the past 10 years. There was only one period -- the 2008 financial crisis -- where bonds held a meaningful performance edge.

So even in a very poor, underperforming deflationary environment, there is an argument to be made for holding stocks over government bonds.

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.