Consider This Your Last Warning
“As people in the summer of 1929 looked back for precedents, they were comforted by the recollection that every crash of the past few years had been followed by a recovery, and that every recovery had ultimately brought prices to a new high point. Two steps up, one step down, two steps up again – that was how the market went. If you sold, you had only to wait for the next crash (they came every few months) and buy in again. And there was really no reason to sell at all: you were bound to win in the end if your stock was sound.The really wise man, it appeared, was he who ‘bought and held on.’“
That’s how Frederick Lewis Allen described the late 1920′s investment environment in his book Only Yesterday: An Informal History of the 1920′s.
After peaking in 1929, the stock market plunged nearly 90%, leading into the Great Depression. Those who “bought and held on” lost their shirts. Years of rising stock prices created the mindset that there was never a reason to sell. Stocks could only go up. This is typical in major market tops.
In the late 1990′s, before the stock market crash, everyone viewed stocks as the best investment you could make. After years of a bull market, everyone thought stocks could only go up.
In 2006, before the housing crash, everyone viewed real estate as the best investment you could make. After years of a boom in prices, everyone thought housing prices could only go up.
So what’s the crowd’s “best investment” today? Investors have flocked into Treasury bonds in recent years. But Treasuries have been rallying for over 30 years now.
The chart below shows the yield on 10-year Treasury bonds. When yields drop, the price of bonds rise. So the downtrend in yields represents the bull market in bond prices.
Treasury Yields Have Been Falling for 32 Years
Yields cannot go below zero. So there’s very limited downside. In other words, bond prices have very limited upside potential and tremendous downside risk.
But those decades of consistent increases in Treasury prices have created the perception that bond prices can only go up. Guess what’s going to happen next? Consider this your last warning to get out of Treasury bonds.