We had a big audience for Jeremy Grantham’s rare interview on WEALTHTRACK last week where he discussed his market melt-up thesis, which is gaining widespread currency on Wall Street. As Grantham said on the program, his melt-up target range for the S&P 500 is 3400-3800. At today’s close of 2821.98 it would only take another 20% move to reach the bottom of his range and 35% to reach the top. However the market’s acceleration, which was so noticeable at the end of last year and the beginning of this, seems to have slowed down. As Grantham noted, ”We’re dealing with great uncertainties when you deal with bubbles and melt-ups. There’s been so few of them.”
Stock market action tends to dominate the financial headlines, especially during a powerful bull market of historic proportions, as we have been experiencing since the market bottomed in March of 2009. The benchmark S&P 500 has climbed nearly 300% percent since those hand wringing days of the last great financial crisis. If you add dividends to the mix and let the power of compounding do its magic the total return is an impressive 376% percent.
But in the background a much longer and greater bull run was playing out in a much larger market and the public hardly noticed. What’s been called the bond market rally of a lifetime started back in 1981 when interest rates on the benchmark 10-year Treasury note peaked at around 15%. They have been pretty much declining ever since and bottomed at 1.45% in July of 2016.
When interest rates fall, bond prices rise. If you owned 30-year Treasury bonds your cumulative return would have been nearly 3000 percent, which translates into an average annualized total return of 9.6%. Those long maturity Treasury bonds famously outperformed stocks during that 36 year period. The stock market’s price appreciation lagged and delivered 9% annualized returns.
If investors reinvested their dividends and took advantage of the power of compounding it was a different story. Then investing in an S&P 500 index would have soared nearly 6,000 percent, or nearly 12% annualized returns. But stocks had several harrowing years of declines while bonds soldiered through with much less damage. Safe haven Treasuries especially thrive in times of crisis.
But with the Federal Reserve raising short term interest rates, many bond market observers are saying the glory days are finally over and that a long bear market in bonds is beginning.
We have two top fixed-income managers with us this week, one who invests in Treasuries and corporate bonds, the other in the largely tax free municipal bond market. Tom Atteberry is a partner and longtime portfolio manager at FPA, which stands for First Pacific Advisors. He is the lead portfolio manager of its award winning flagship FPA New Income fund which carries a Bronze Medalist rating from Morningstar for providing a “…safe haven from losses and bond market excesses.” FPA New Income’s goal is to deliver a positive return every year, in other words not lose money, and beat inflation over multi year periods, specifically the consumer price index, by 100 basis points or a full percent.
Robert DiMella is Managing Co-Head of MacKay Municipal Managers, part of the fixed income and equity firm MacKay Shields, a division of New York Life. New York Life is a WEALTHTRACK sponsor but DiMella is here on his own investment merits. He is a portfolio manager of several award winning funds including its flagship MainStay Tax Free Bond Fund which is also a Morningstar Bronze Medalist.
If you’d like to see the show before it airs, it is available to our PREMIUM subscribers right now. We also have exclusive EXTRA interviews with Atteberry about one of his new favorite pastimes and with DiMella about the recent launch of his two actively managed municipal bond ETFs.
Thank you for watching. Have a great Super Bowl weekend and make the week ahead a profitable and a productive one.