Executive Summary

History does not repeat, but it rhymes, as Mark Twain observed. As such, we are struck by the eerie and dangerous parallels between today’s markets and the markets back in 1999. Back then, Value investing and Value managers were under the gun for having underperformed their Growth brethren for too long. Valuation spreads between the U.S. and Emerging Market equities were wide, the U.S. was witnessing speculative and “bubbly” behavior on the part of retail investors, and, yes, GMO was looking stupid for still believing that valuations mattered and the gravitational pull of mean reversion would eventually work. While it is, of course, not 1999, we see ominously similar market phenomenon today. And for that reason, our advice is clear – it’s time to leave the party like it’s 1999.


Let’s state the obvious: it is not 1999. True, stock market valuations in the U.S. are ridiculous today, but they are not yet at the absurd levels reached in the late 90s. Further, many of the largest tech companies today, the so-called FAANGS, are likely not part of the bubble problem: these companies are real and large global businesses, highly profitable, and millions, even billions, of people use their products and services every day.1 These behemoths are nothing like Pets.Com, WebVan, and other infamous Super Bowl ad buyers from the dot.com bubble era. Too, interest rates are significantly lower today and, while a debatable point, many argue that lower rates ipso facto should lead to higher equity valuations.2 So, again, this is not exactly 1999 all over again. But history never exactly repeats, it merely rhymes, as Mark Twain thoughtfully pointed out. And today, there are some eerily similar and dangerous rhymes echoing in our ears.

Avoid the Conventional 60/40 Portfolio…Just Like 1999

Currently, we are advising all our clients to invest as differently as they can from the conventional 60% stock/40% bond mix, just as we were advising them in 1999. Back then, we were forecasting a decade-long negative return for U.S. large cap equities. And that is exactly what happened. Today, the warning is actually more dire. U.S. stock valuations are at ridiculous levels against a backdrop of a global pandemic and global recession, and CAPE3 levels are well above 2007 levels, within shouting distance of the foreboding highs reached in October 1929. But it gets worse. U.S. Treasury bonds – typically a reliable counterweight to risky equities in a market sell-off – are the most expensive they’ve been in U.S. history, and very unlikely to provide the hedge that investors have relied upon.4 We believe the chances of a lost decade for a traditional asset mix are dangerously high. Exhibit 1 lays out the long and sad history of these numerous lost decades for 60/40 portfolios. What they all had in common was that each began with stocks or bonds being expensive. Today, stocks and bonds are pricey. This frightens us and it should frighten you. Few investors want to hear this because the 60/40 portfolio has worked so wonderfully for the past 10 years. Unfortunately, they were saying the same thing back in 1999, right before it failed them for a decade.


EXHIBIT 1: 60/40 “LOST DECADES” ARE MORE COMMON THAN YOU THINK

Most started with expensive stocks or bonds – today, both are

As of 9/30/20 | Source: Bloomberg, Global Financial Data (early history), Factset (S&P 500 returns and CPI), J.P. Morgan (J.P. Morgan GBI United States Traded), Shiller data; real yields are the yield on the 10-Year U.S. Treasury minus the 12-month trailing CPI.
*60% U.S. Equities (S&P 500), 40% U.S. Bonds (U.S. Treasuries) rebalanced monthly. Past Performance is not indicative of future results.