Questioning the outlook for bonds and equities

In his latest weekly commentary, Corey Hoffstein, Chief Investment Officer and Chief Technology Officer of Newfound, questioned two widely-held beliefs in the investment world.

First, he looked at the expected direction of bond prices.

For the last several years, analysts, market commentators, and speculators alike have been claiming that interests rates must rise at some point, and when that day came, any investor that held long-duration bonds would be in for a world of pain.

It takes less effort to prove something false than it does to prove something true... To prove something false, you only need a single contradictory example.

With 30 Year U.S. Treasury Bond yielding 2.69%, rates going up does seem like the obvious conclusion...

Looking abroad, however, we can find our single contradictory example. Germany’s 30-Year Bunds are currently yielding 1.25% and fell as low as 1.05% on Wednesday...

Then he looked at equity as long-term investments.

... It is commonly held that stocks will appreciate over the long run... We simply ask: how do Japanese equities fit into this belief model?

Japan’s GDP is nearly unchanged for the last 20 years and the Nikkei 225 has been similarly unchanged for those that bought-and-held over that period. After 20 years, Professor Norihiro Kato suggested that Japan might, perhaps, be the world’s first “post growth” society, focused less on consumerism and growth and more on quality of life. No amount of stimulus will be able to reboot that sort of cultural change.

However, Japan has often been considered an exceptional case because of its declining workforce. As Tony Kelly, economist at National Australia Bank, wrote: “Japan's population is already declining, and with its society also ageing the drag on the workforce is potentially even greater.”

Indeed, with an ageing population, stimulus may make things even worse by burdening society with more debt.

However, Japan will not be an exceptional case for much longer. From a recent report from the McKinsey Global Institute on global growth: “The demographic tailwind that powered the world economy over the past 50 years is declining in most countries and even becoming a demographic headwind against growth.”