Here’s a quote from Cliff Asness who was the subject of this week’s interview in Barron’s;
But it’s actually worse for that 60-40 combination of stocks and bonds, and that’s where a lot of people’s intuition might fail them. The 60-40 portfolio has been cheaper than it is now 98% of the time.
Elsewhere he notes that domestic stocks have been cheaper than they are now 80% of the time and that bonds have been cheaper than they are now 90% of the time. He says that usually when one of the two is expensive investors can simply favor the cheaper asset but with both now expensive, in his view, that is where the 98% for the combo comes from.
Asness does not believe in the typical 60/40 mix or other similar mixes. He is a proponent of risk parity (you can read the interview or Google him to learn more thoroughly) in his funds which has a different look than 60/40 or 50/50.
There is an element of John Hussman’s work in Asness’ comments. Hussman writes regularly about what he sees as current valuations for markets but takes it a step further than Asness (at least what Asness talked about in the interview) by quantifying what returns can be expected based on the prevailing valuation at the time. If Asness is drawing the correct conclusion then we might expect that average returns to be weak until valuations become more favorable.
The last four and half years have offered very good equity returns and if Asness is correct then the next few years won’t. If Asness is incorrect then maybe the good times will last. But there is an important thing to remember which is there is no playbook for the current situation we find ourselves in.
Many pundits we think of as being perma-bulls have been pointing to what they believe are improving fundamentals at companies and signs of recovery in macro data as well. Whatever the reality of improving fundies and macro recovery it has occurred with the Fed keeping rates at zero and buying a lot of debt every month. Rates will still be at zero and they will still be buying a lot of debt even if they start to taper this month.
This raises the question of whether the bulls have been right for the right reasons or right for the wrong reasons. If the former is the case then Asness’ argument probably doesn’t hold water. It is difficult to believe there isn’t at least some right for the wrong reason embedded in this discussion. If you can accept that might be true then you should want to remain cautious.
The picture is from Ripley, CA from last February when I drove to San Diego for a college reunion.