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Rekenthaler Report

Can You Predict the Next Downturn? (Bond Edition)

Not by expecting bonds to behave like equities, you won’t.

Pattern Seeking
Today’s column builds upon my recent article, “Can You Predict the Next Downturn?” That article inquired whether U.S. stocks revert to the mean, so that knowing their previous performance informs their future results. The answer was “Yes,” with the sizable caveat that this condition only applies to 20-year time periods, which not only makes for prolonged wagers but also permits few independent observations. That finding could easily be accidental.

Today’s article asks the same question of high-quality bonds. As before, the data come from “Stocks, Bonds, Bills, and Inflation,” research that was originally compiled by Ibbotson Associates and which is now owned by Morningstar. The returns begin in January 1926, are monthly, and are adjusted for the effects of inflation (that is, they are “real”). This column uses the Long-Term Government Bond Index, which tracks the performance of 20-year Treasuries.