Stocks continue rebound from January funk, but bonds flat in May. Our view on market valuations and likely returns. The important dimension of inflation.
Take this to the bank. If indeed we are in a moderate return environment, then the margin for error is smaller, and it is more important than ever to invest in index funds, keep costs low, and to avoid both inertia and opportunity costs associated with active management.
The broad bond and stock markets have produced about the same return so far in 2016 – about 3.5% -- but they’ve followed markedly different paths.
The bond market returns have been above expectation on a slowdown in economic growth from Q4 2015. The stock market continued to recover from a 13% drawdown earlier in the year on optimism that the US economy will continue to muddle through in the face of global concerns, and on the reality that stocks, on an after inflation basis, present better relative value and are apt to provide better returns.