A backdrop highly reminiscent of the late 1980s
We have been on the same page as our colleague, Richard Bernstein, on his view that the current backdrop is highly reminiscent of the late-1980s cycle. Of course, no two cycles are ever quite the same, but some very similar patterns have emerged.
The late 1980s was a cycle characterized by a synchronized global expansion, but in the context of a fatigued US economy and strength back then in Europe and Asia.
A cycle fuelled by tax cuts and highly accommodative monetary policies early on, "new paradigm" views on the equity market bull run, and a massive housing boom that morphed into a bubble and credit excesses that turned into a crunch.
As was the case this time around, the Fed moved in the latter stages of the cycle to hike rates aggressively and invert the yield curve. As is the case today, practically every reason was cited for why the yield curve didn't matter any more (nice call).
Back then, the Asian stock market that caught everyone's attention was Japan - today it is China.
We also experienced a wave of LBO-financed merger and acquisition activity that certainly also took hold through most of 2005 and 2006.
Of course, we also had a faltering dollar in the late 1980s and rising commodity and gold prices igniting concerns over the inflation landscape - concerns that we can now say were overdone.
Globalization was the watchword back in the late '80s Recall NAFTA and the fears of protectionism that prevailed upon its inception. Recall Ross Perot's success in terms of the popular vote in the 1992 election and the election of Bill Clinton, considered at the time to be populist and left-of-center. Back in that cycle, it was Japan (followed by Mexico) that was front and center in the minds of congressional protectionists. Today it is China.
Add Treasury bonds to the portfolio
We even have a Bush in the White House and troops in Iraq just to complete the comparison. If the leveraged cycle of the 1980s ended in a consumer recession as the credit excesses were purged, and a similarly overbuilt, over-borrowed and over-owned housing market deflated for a period of several years, culminating in the S&L crisis, RTC and the credit crunch, it should come as no surprise to economic historians that we are seeing many of the same stresses emerge this time around. This is a time to be adding Treasury bonds to the portfolio and stepping up quality across every asset class.