The Great Divergence
07/12/2010 0 comments
As always, we admire greatly the Hussman Funds' logical and information rich analysis on economics and markets. Bill Hester has penned many in-depth analysis articles. In the latest article, he wrote "For a brief period during the last decade the developed economies around the world became one. Countries shared similar fiscal policies, interest rate policies, and spending patterns which resulted in uncharacteristically similar economic performances. Investors took their cues from these trends and sent financial market securities converging in price and yield. The range of bond yields tightened, the level of valuations became closely aligned, and trailing stock returns were remarkably similar. As the developed economies continue to recover from the world-wide credit crisis, and now face new pressures of over-levered sovereign balance sheets and the prospects for below-average economic growth, investors should expect financial market performance among countries to continue to diverge."
This is very much consistent with our belief that global diversification in stocks and bonds is the first step for better investment results. However, merely holding U.S. and international stocks and bonds is not enough: one needs to be nimble to recognize the economic and market trends in these assets. Tactical asset allocation, if done right, will enable one to avoid pitfalls and capture upsides.
Specifically from the article, bond yield divergences and economic divergences are discussed in details. These are especially relevant to investing in the two major asset classes: fixed income and equity (stock).
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