An update and extension of the method described in Comparing Treasury Bond Returns to Expected Stock Returns, this comparison also includes the “cash-like” investments known as Treasury Bills.
Future Return Expectation for the S&P500
As previously discussed, the first requirement needed to compare the long-term return expectation for stocks and other asset classes, is a valuation metric that correlates well with actual outcomes; the MarketCap/GVA valuation expectation has had a 93% correlation with actual returns over the corresponding 12-year period that followed the expectation – its accuracy can be seen as the blue line (expected return) closely aligns with the red line (actual return).
Chart source: John Hussman’s weekly market comment on 6/19/2017 entitled How to Wind Down a $4 Trillion Balance Sheet
The current stock expectation is as follows: if the S&P500 is held from now until 2029 (i.e. 12-years), a return of approximately 0% will be received — this is one of the lowest U.S. stock return expectations in history.
Comparable Treasury Bond Yields
The yield calculation for 12-year U.S. Treasury bonds (also previously discussed) is now 2.286% per year (10year treasury bond yield * 0.8 + 20year treasury bond yield * 0.2 = 2.22 * 0.8 + 2.55 * 0.2). One can see that if it’s held to maturity, the return on a Treasury bond is approximately 27% from now until 2029 (i.e. 12-years).
Comparable “Cash-Like” Treasury Bills
3-Month U.S. Treasury Bills currently have a yield of 1.02% — i.e. if they are held to maturity (3-months) the return is 1.02%. If an investor purchased a 3-month Treasury Bill and repurchased new ones as the old ones expired over the following 12-year period, the stream of yields from those Treasury Bills would be very difficult to calculate as the future yields may be higher or lower due to Fed funds rate movements (among other influences). For this reason the safest expectation would be an assumption of “greater than 1%” (i.e. the minimum return for only one 3-month Treasury Bill) even though the return may be much higher.
12-Year S&P500 Return Expectation vs. Treasury Bond Yield vs. Treasury Bill Yield
One should now be able to see that U.S. Treasury bonds and even “cash-like” U.S. Treasury Bills are now set to outperform the S&P500 by the end of the forthcoming 12-year period (2017-2029) — and without the risk associated with stocks:
- 12-Year Return Expectation for S&P500: ~0%
- 12-Year Return Expectation for 3-Month Treasury Bills: >1%
- 12-Year Treasury Bond Return: ~27%