Outlook for the 2020s

Let’s open with a big picture review of the first twenty years of this century. For the following major asset classes, from WTBFOTS 2000 0101 to 2020 0101 (when the ball fell on Times Square), the total returns in US dollars were as follows:

As a multiple:
US TBills: 1.4138
US TBonds: 6.9686
Stocks: 2.8713
Copper: 3.1777
Gold: 5.3200

In percentage terms:
US TBills: 41%
US TBonds: 597%
Stocks: 187%
Copper: 218%
Gold: 432%

US TBills: 1.75%
US TBonds: 10.19%
Stocks: 5.42%
Copper: 5.95%
Gold: 8.72%

Plotted semilog:
Returns 2000-2020

To those who get their financial news from mass market media, it may come as a surprise that copper, gold and long term US Treasuries handily outperformed stocks over two decades.  It should come as no surprise that outlets aligned with Wall Street prefer to tout Wall Street investments.  But here at Financology we have no such outside masters.  The actual historical record speaks for itself.

Imagine that … mere chunks of inert metal outreturned stocks over twenty years … the asset class we’re taught to count on for “the long run”.  Why?  Simple … stocks started out overvalued.  This also informs our outlook for the next ten.

In our last installment, Major Trend Review, we briefly discussed our outlook for the next decade.  Reversing the order of the past decade, nonUS stocks will power ahead over US stocks.  Stylistically, “value” will outperform “growth”.  Physical commodities such as copper and gold will outperform US stocks.  Why?  Valuation.  By a variety of measures – price to revenue, price to dividends, price to book, market cap to economic output, investors’ stock allocations – US stocks are historically overvalued.  US Treasuries, while more attractive than most other sovereign bonds, are likewise richly priced and unlikely to repeat their outperformance of the past two decades.

These are high confidence long term calls.  (Insert graphic of pounding the table).  The recently updated Synthetic Systems charts (posted under Market Analysis) are shorter term in nature, and inherently more speculative.  I think of the long term outlook as an aid in deciding how much of each asset class to own; Synthetic Systems helps with when to make the adjustments.

6 thoughts on “Outlook for the 2020s

  1. jk says:

    the biggest component, by far, of commodity indices is energy. but of course oil doesn’t have a Ph.D. like Dr. copper. any thoughts on how well your copper projections track with energy prices?

    1. Bill Terrell says:

      Sure, JK. We can put numbers on it. The raw correlation coefficient of weekly copper and oil (WTIC) prices over the past twenty years – since the beginning of 2000 – is 0.8675 … on a logarithmic basis (more meaningful since it registers halvings or doublings the same) it’s 0.9051. Correlations are a bit tricky though, since they depend on how frequently you sample the data. The correlation rises as you use longer intervals … for example if you use quarterly data the correlation exceeds 0.99. This stands to reason, since as you extend the time frame, commodity price fluctuations are increasingly dominated by changes not in the individual commodities, but in their common denominator – the value of the currency unit you’re pricing them in.

      So as the dollar loses value to inflation, dollar denominated physical commodity prices will rise in kind merely by virtue of remaining the same in real terms. BTW my comments aren’t with respect to any particular commodity price index … although some, such as the GSCI, are overwhelmingly energy weighted, others are not. One source, however, that supports the commodities outperformance thesis, Jeff Gundlach at DoubleLine, IIRC cites the energy-heavy GSCI.

      In the spirit of a picture is worth a thousand words…

      Copper & Oil, log scaled
      Copper & Oil, Log Scaled

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