Even prior to this week’s stock sell-off, defensive plays like U.S. Treasuries and gold have outperformed equities, writes Mike Larson.
I want to tell you about the hottest investment around. This asset has been surging virtually nonstop. It has crushed the S&P 500 year-to-date, over the last year, and even over the last two years.
It goes up on good days. It doesn’t give back much on bad days. When the Dow plunged more than 1,900 points on Monday and Tuesday, it took off like a rocket.
And unlike the latest hot tech stock story out there, it looks like this investment will continue to perform well.
Intrigued? Excited? Then I won’t keep you waiting any longer. I’m talking about Treasury bonds.
Yep. Plain-vanilla government paper. Whether you’re talking about traditional, long-term, interest-paying bonds — or special Treasury debt securities called zero-coupon “STRIPS” (See this Treasury Department website for more details on how these work) — the story is the same.
They’re beating the pants off flashy stocks!
Remember my Weiss Ratings Screener? Recently, it’s shown how boring exchange traded funds (ETFs) that track defensive sectors and asset classes are performing relative to exciting ones (see table below).
Well, the performance gulf is almost unbelievable now.
The Vanguard Extended Duration Treasury Index Fund (EDV) tracks those specialized STRIPS. It has already returned more than 15% year-to-date! Over the last year, it has returned 37%, and almost 46% over the last two years.
What about the S&P 500, as measured by the SPDR S&P 500 ETF (SPY)? The comparable figures were recently 0.1%, 17.5% and 21.9%.
In other words, it’s not even close!
Even the more widely held iShares 20+ Year Treasury Bond ETF (TLT) — which is less sensitive to interest rate moves than EDV — is taking stocks to the cleaners.
Source: Weiss Ratings, Data Date: Feb. 24, 2020
I could also point out that gold, as measured by the SPDR Gold Shares (GLD), is now trouncing the SPY on a YTD and 12-month basis. Gold and silver mining shares, as tracked by the VanEck Vectors Gold Miners ETF (GDX), are crushing the S&P 500 on every time frame.
But hopefully my point is clear: This is not the same, unadulterated bull market for stocks we had from 2009 through early 2018. The game has changed. The cycle is turning. The economy is running out of steam.
And the spread between the performance of winning and losing investments is getting more dramatic by the day. Here’s the most important thing of all to keep in mind: This is not all related to the Coronavirus!
Yes, the outbreak is a tragic, sad development. We can all only hope for the best from a human and societal standpoint. But from a market standpoint, the virus news is only accelerating and amplifying trends that were already in place — and have been for 24 months and counting. Sure, Monday and Tuesday’s market carnage was surely a reaction to news that the virus was spreading more than previously thought, but this sell-off doesn’t account for the weak performance mentioned above.
In other words, even without this Coronavirus outbreak, “boring” Treasury bonds would still be one of the best performers in town.
As an investor, your best move is still to stick with a “Safe Money” game plan. By that, I mean:
1) Take note of how defensive investments like Treasuries, gold and income-oriented stocks are dominating here, and
2) Adjust your own portfolio to take advantage of that.
It’s not happening by accident. Market movers are getting defensive for some very important reasons. And it’s imperative that we all react and adapt to it in a prudent, decisive fashion.
