The Best of Times

It is the best of times.

The age of wisdom.

The epoch of belief.

The season of Light.

The spring of hope.

We have everything before us.

Image of Donald Trump in front of New York Stock Exchange


The financial markets have become a tale of one city, a utopia in which the streets are paved with risk-free reward. Try to remember the air of invincibility that abounds today, as we may not see anything like it for years to come…

  • The S&P 500 ended July up for the 9th month in a row and 16th time in the last 17 months.

S&P 500 total return index image from 2008 to 2018

  • The Volatility Index (VIX) hit its lowest level in history.

Volatility Index hit its lowest level in history image

  • At 5.6%, annualized volatility in the S&P 500 over the last 12-month is just about as low as it’s ever been.

S&P 500 rolling volatility image from 1928 to 2017

  • It’s been more than a year since the S&P 500 has suffered a 5% pullback, the 4th longest streak in history.

Image of longest streaks of S&P 500 without a drawdown from 1928 to 2017

  • The Dow has hit 31 all-time highs in 2017 and has done so with no more than a 3% pullback.

Dow Jones Industrial Average vs 2017 Price Return image

Sentiment is ebullient, with 1) the S&P 500/Dow/Nasdaq 100 on pace for their 9th straight year of gains, 2) record-low volatility, 3) the U.S. economy in its 8th year of expansion, and 4) the Federal Reserve maintaining an extraordinarily easy monetary policy.

Inflation is tame, credit is loose, and any geopolitical concerns (Syria, Iran, North Korea, etc.) are quickly dismissed. Even Greece, who not long ago was said to be certain to default, is back out issuing bonds again. The bond offer was oversubscribed as Greek yields hit their lowest levels since 2009.

Image of 2 year yield of Greece

President Trump has taken to twitter on a daily basis to promote successes in the stock market, with the implication being that all-time highs are evidence of a booming economy and a direct consequence of his efforts.

Tweets by Donald Trump about stock market

If these are the best of times, we should certainly enjoy them, for they will not last forever. But we should also recognize that the best of times tends to mean poorer risk/reward, just at the worst of times coincides with opposite. When the streets appear to be paved with risk-free reward they are instead paved with reward-free risk…

  • 10-years ago, you could have bought 3-month Treasury bills at a 5% yield. Today, U.S. Junk Bonds (HYG) yield less 5%.

Portfolio characteristics of iShares iBox Corporate Bond ETF and 3 month US treasury yield

  • European Junk Bond yields are at record lows.

Image of European high yield index

  • Leveraged Loan (BKLN) yields are at record lows.

Image of Leveraged Loan yields at record lows

None of this matters in the short run. Markets can always go higher; we saw that in 1997 when the Shiller P/E Ratio (CAPE) was at the same level as today (above 30). Exuberance can always become more irrational and greed can always become greedier.

But the tranquility that exists in markets today – from stocks to bonds and everything in between – will be hard to surpass for some time. These are the best of times. Enjoy.


Related Posts:

Irrational Optimism

Is This 1929 or 1997?

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.


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