A Bear Market In Stocks Is Five Times Scarier Than A Bear Market In Bonds

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Investors Shouldn’t Be As Afraid Of A Potential Bond Bear Market, As A Potential Bear Market In Stocks (Vanguard)

In a new paper titled ‘Risk of loss: Should the prospect of rising rates push investors from high quality bonds,’ Vanguard’s Christopher Philips argues investors should be more worried about a potential bear market in stocks than a bear market in bonds.

“Even the worst 12-month period for the U.S. bond market historically saw a little more than just one-fifth the losses of the worst 12-month period for the U.S. equity market.” The paper also argues that if there were to be a bear market in bonds, investors could “somewhat offset price declines with higher nominal yields and potentially higher subsequent nominal returns.”

Times Are Getting Harder For RIAs (Investment News)

Registered Investment Advisors (RIAs) are focused on financial planning and use fee-based compensation models. Now, Investment News reports that wirehouses and regional brokers are increasingly encroaching on both of these areas, making it more challenging for RIAs to compete. “It’s a huge challenge to figure out how to grow your firm from here,” Michael Kitces of Pinnacle Advisory Group told Investment News. “When you’re competing against someone who may or may not be a fiduciary but uses the same business model, it’s indistinguishable.”

Mega-Cap Stocks Are Positioned For A Prolonged Period Of Outperformance (BMO Capital Markets)

Brian Belski at BMO Capital Markets thinks that mega-cap stocks are “positioned for a prolonged period of significant outperformance.” He points out that mega-cap stocks underperform during the early years of bull markets but historical patterns. 

“Another characteristic that we believe is a strong tailwind for mega-cap stock performance is that most institutional investors remain underexposed to these stocks. …Fund managers have been underweight mega-cap stocks for seven consecutive years, and have become increasingly so in recent years. This is important because pre-financial crisis, most fund managers maintained healthy overweight positions towards mega-caps. 

“If the past few years have taught us anything, it’s that fund managers will pile into an asset class once it starts performing well (or avoid ones that have been performing poorly). So it is not too surprising they remain underweight mega-cap stocks given their underperformance in recent years. However, should these stocks begin to outperform in the coming months, as we expect, the fact that fund managers are underexposed is likely to boost performance, as fund managers play ‘catch-up’.”

MANKIW: Why It Makes Sense For Investors To Have Some Gold In Their Portfolio (The New York Times)

Harvard economist Greg Mankiw said investors should give gold a 2% weight in their portfolio. This is for four key reasons. 1. There isn’t a lot of gold and a lot of it isn’t available to investors because it exists in the form of jewelry. 2. “Over the long run, gold’s price has outpaced overall prices as measured by the Consumer Price Index — but not by much.” 3. Gold is extremely volatile. 4. Gold however doesn’t correlate with stocks or bonds and could therefore reduce risk and a small allocation could be attractive.

Hedge Funds Are Buying Up Detroit Bonds So Fast There’s A Waiting List (CNNMoney)

CNNMoney reported that the Detroit Municipal bond has become “the hottest trade on Wall Street.” This is because hedge funds are betting that these bonds will be a good bet in the long run.

“Shortly after Detroit filed for bankruptcy, several hedge funds managed to buy $5 million of pension bonds for 41 cents on the dollar. Those were some of the only pension obligation bonds available.

“Hedge funds are also eyeing about $1 billion in general obligation bonds backed by Detroit. More of these have changed hands, but also in small increments. One hedge fund manager said he was able to procure $30,000 of general obligation bonds at 75 cents on the dollar from a dentist in Milwaukee. The fund was hoping to buy several millions of dollars’ worth, but so far, that’s all they can get their hands on.”

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