Over long periods of time the stock market outperforms bonds by a substantial margin. But, it should come as no surprise that bonds were the winners over the past two years. In fact, bonds have outperformed the S&P 500 by a 60% premium, the strongest difference in seventy years (1931 and 1932). Tom Galvin of Credit Suisse First Boston notes that the year following the strong bond performance, stocks posted a 54% return in 1933 as the cycle reversed. A similar story of good treasury returns during two consecutive bad years for equities came during 1973 and 1974. That period was followed by greater than 60% returns in 1975-76. The left-hand graph below reveals just how significant the signs are that we are at a critical turning point for stock and bond investors. If the cycle repeats, the next twelve months could bring strong returns to stock investors.
