The Great Recession stock market crash of 2008 – 2009 brought some structural changes to the markets. Two of the most profound changes entered the investing world’s acronymic lexicon: ZIRP and TINA.
Zero Interest Rate Policy. ZIRP. The term was first coined in the 1990s when Japan became the first notable government to embark upon monetary policy targeting short-term interest rates at zero. “ZIRP” became common parlance in 2008 when the Federal Reserve implemented their own rendition – unprecedented in U.S. history. Milton Friedman said there is nothing so permanent as a temporary government program, and here is the effective federal funds rate (the rate typically referred to when people talk about ZIRP) from the beginning of 2008 through the end of 2021:[i]
ZIRP remained in place through 2015 – much longer than anyone expected when first introduced. The Fed slowly began stepping interest rates back up in 2016 but that lead to the “taper tantrum” when the S&P 500 fell 20% in the fourth quarter of 2018.[ii] You can see the Fed ease up on rates in 2019 before fully recommitting to ZIRP in 2020 (COVID response). The equity markets responded positively – the S&P 500 rallied 29% in 2019[iii] and 119%[iv] (!!) from the day the Fed announced it would fully recommit to ZIRP in March of 2020 to the end of 2021.
Here is the S&P 500 (blue line) and the NASDAQ (red line - think tech stocks) from the beginning of the Fed’s ZIRP policy in 2009 through 2021:[v]
S&P up over 13% annualized and tech up almost 20% annualized. That was one side of the ZIRP coin. The other side of the coin was low yields on fixed income assets (CDs, treasuries, bonds, etc.). Which makes sense - the prevailing policy had the words “zero interest rate” in the title, so it was hard to earn much on anything with a yield tied to interest rates. During that period the average yield on a 10-year treasury was 2.28%.[vi] I don’t care how credit-worthy the lender is, handing over your cash for 10 years for only ~2% annualized is depressing. The 30-year treasury rate averaged only 3.04%.[vii] 3% for 30 years! No thank you.
The ZIRP phenomena sired the second acronym entering the lexicon in the 2010s: TINA. There Is No Alternative. That is, if you want your money to grow, where are you going to put it other than equities? Buy long duration treasuries at 2-3% yields? Sit on cash earning 0.1% in your savings account? What’s the point? Stocks were the only asset offering attractive returns. There. Is. No. Alternative. ZIRP married TINA and birthed a decade-plus roaring bull market (see chart of S&P 500 and NASDAQ above).
Which led to all sorts of speculation over that decade-plus roaring bull market about what happens when ZIRP disappears. Because when interest rates rise off zero suddenly there will be an alternative. TINA will be relegated to the history books. That was conventional thinking. The 2018 Taper Tantrum seemed to confirm it. The Fed started raising rates, and the equity markets puked 20% in a quarter. No more ZIRP = No more TINA = no more bull market.
2022 seemed to offer further confirmation of the theory. You know the story. Inflation forced the Fed to embark upon its fastest rate hiking cycle ever and the equity markets threw a tantrum. Here is the S&P 500 and the NASDAQ – same chart referenced earlier – from the beginning of 2022 to the middle of October 2022 (Fed started hiking rates in March ’22):[viii]
No more ZIRP = No more TINA = no more bull market.
Jerome Powell ended ZIRP and killed TINA. Now there is an alternative. Suddenly treasuries yielded 4% in 2022![ix] The consensus trade of the year while the equity markets were bleeding, and the Fed was furiously hiking short-term rates was nearly unanimous: short-term bonds. The same sentiment was bandied about the internet and around the dinner table: why take risk when we can finally earn some yield on cash? Short-term treasuries were paying over 4%! Savings accounts at the bank are paying 3-4%! Why deal with the vagaries of stocks when I can get paid (4%!) to sit in cash with no risk?
“Risk” is a tricky concept in this business. Financial advisors must be very careful about misrepresenting the risk of an investment. If one says something like “the stock market averages 10% per year” the SEC (Securities & Exchange Commission, not the Southeastern Conference) will have something to say about that. They will say that is a misrepresentation, that it must be made clear the market does not go up 10% every year, and many years it goes down quite substantially, and there are no guarantees, and past performance is not predictive of future results, and lots of additional fine print. They are very strict about this kind of thing! I don’t add all the footnotes and disclosures at the bottom of these posts for fun. Financial advisors pay compliance departments quite a bit of money to constantly monitor their own communication with their clients to keep from running afoul of the SEC’s myriad rules regarding communication.
But financial advisors can call U.S. Treasuries “risk-free” all day long. That is literally how they are described in the finance textbooks. “Risk-free” is the official finance jargon ascribed to U.S. Treasuries. In fact, Treasuries being “risk-free” is the underpinning of the entire Capital Asset Pricing Model, which underwrites basically all modern financial theory. So financial advisors can tout “risk free” securities to their clients all day long – as long as they’re talking about U.S. Treasuries. And what client doesn’t want to hear about a “risk-free” investment that earns 4% when the market is down 20+%? (*ahem, 2022*)
There is one problem. Treasuries’ “risk-freeness” describes their protection of principal. The assumption is if you loan money to the U.S. government (that is what you are doing when you buy a Treasury – you hand Uncle Sam cash and he hands you a promise to repay what you loaned him + interest), you are guaranteed to get your money back. The government won’t default. That’s a fine assumption, but it is not the only risk out there. The textbooks admit Treasuries are subject to reinvestment risk and interest rate risk, but 2023 has reminded everyone of another risk: opportunity cost. You can earn 4% (annualized) “risk-free” in Treasuries while stocks rip 20% in six months.
Indeed, in hindsight aren’t the down times (* ahem, 2022*) just when one ought to be salivating about buying equities? People look at charts of past market declines envious of those magnificent buying opportunities. Who hasn’t looked at a chart of the S&P 500 and pinpointed March 2009 as a wonderful time to buy?
The S&P has returned 16.49% annualized since then.[x] A $100,000 investment has grown to over $901,000. Funny the way fourteen years of hindsight makes that 55% Great Recession decline look so trivial…
And yet, when the S&P was down 24% in 2022,[xi] all anyone wanted to talk about was BONDS and TREASURIES and RISK-FREE YIELD. Why suffer 20+% drawdowns in the equity markets when I can get 4% risk-free? TINA is finally dead! It turns out it’s easier to talk about buying when there is blood in the streets[xii] than actually buying when the streets are bloody. Much easier to buy Treasuries with a safe “risk-free” yield.
In the midst of the excitement in 2022 about “risk-free” yields and high yield savings accounts propelled by fears of inflation/midterm elections/war in Ukraine/supply chains/interest rates/etc.… Here are the major asset class returns since mid-October of 2022 – which turned out to be the market bottom, about four weeks before the mid-terms – through July 2023:[xiii]
Large cap (S&P 500), tech (NASDAQ), and international stocks (MSCI ACWI ex USA) all up over 30% (in 9.5 months!). Mid cap (S&P 400) and small cap (S&P 600) stocks are up 23% and 19%, respectively. And global REITS (think commercial real estate) are up 15%.
And then there are those “risk-free” short-term Treasuries (SHV)... Up 3.45%.
“Risk-free” just doesn’t look that sexy anymore, does it?
So ZIRP is gone. And TINA is dead. But the stock market doesn’t care. It’s been too busy ripping the faces of the folks chasing 2022’s consensus best investment idea. Too busy reminding us that “risk-free” is not without its downsides.
Sean Cawley, CFP®
To be clear, there were very good reasons to invest in Treasuries and short-term bonds in 2022 and 2023. Such a portfolio has been a wonderful option to reposition cash and other short-term assets earning <1%. It is quite nice to earn 4-5% on short-term assets you’ve earmarked for some purchase in the next 1-3 years. But “risk-free” assets have not been a refuge from the vagaries of the equity markets for long-term investors seeking to grow their wealth. For those investors, the flight to safety in “risk-free” Treasury yields has unfortunately yielded their faces getting ripped off.
Will the equity market rally continue? We have no idea. We advocate investing in equities when you have a long time horizon. Tune out the headlines and don’t worry about what the market has done recently if you don’t plan on using the money for a decade or longer.
Neither asset allocation nor diversification guarantee against investment loss. All investments and investment strategies involve risk, including loss of principal.
Content here is for illustrative and educational purposes only. It is not legal, tax, or individualized financial advice; nor is it a recommendation to buy, sell, or hold any specific security, or engage in any specific trading strategy. Results will vary. Past performance is no indication of future results or success. Market conditions change continuously.
This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change at any time without notice.
[i] YCharts, Fundamental Chart, Effective Federal Funds Rate, 01/01/2008 – 12/31/2021.
[ii] YCharts, SPX Total Return Fundamental Chart, 10/01/2018 – 12/24/2018.
[iii] YCharts, Fundamental Chart, SPX Total Return Level, 01/01/2019 – 12/31/2019.
[iv] YCharts, Fundamental Chart, SPX Total Return Level, 03/23/2020 – 12/31/2021.
[v] YCharts, Fundamental Chart, SPX & IXIC Total Return Level, 01/01/2009 – 12/31/2021.
[vi] YCharts, Fundamental Chart, 10 Year Treasury Rate – Average, 01/01/2009 – 12/31/2021.
[vii] YCharts, Fundamental Chart, 30 Year Treasury Rate – Average, 01/01/2009 – 12/31/2021.
[viii] YCharts, Fundamental Chart, SPX & IXIC Total Return Level, 01/03/2022 – 10/12/2022.
[ix] YCharts, Fundamental Chart, 3 Month Treasury Rate, 01/01/2022 – 12/31/2022.
[x] YCharts, Fundamental Chart, SPX Total Return Level, 03/09/2009 – 07/31/2023.
[xi] YCharts, Fundamental Chart, SPX Total Return Level, 01/03/2022 – 10/12/2022.
[xii] “The time to buy is when there's blood in the streets.” – Baron Rothschild
[xiii] YCharts, Fundamental Total Return Chart, SPX/IXIC/MSACXUSTR/MID/SML/CRUSREIT/SHV, 10/12/2022 – 08/01/2023.