An economist I knew years ago made an exhaustive study of the real and nominal returns generated over long periods of time by both stocks and bonds in OECD countries. His conclusion:

–stocks return inflation +6% yearly

–government bonds return inflation +3% yearly.

In today’s world, of low and hard-to-affect inflation, the +x% are probably too high for bonds. It’s harder to figure what to make of stocks, since their returns have been considerably above the +6 pretty steadily since the 2008-09 financial crisis.

Let’s say that the return on a 10-year Treasury should be inflation +1% annually. That would fit 2018 and 2019 experience, when inflation was running around 2% and nominal yields were around 3%.

Where we are now: inflation at, say, 0.6% and the 10-year at 1.45% today. That’s up from 0.6% last summer. However, if we could wave a magic wand and return the US to a pre-pandemic state, inflation would likely be 2%+. That would imply the 10-year at 3%.

If so, we’re a little less than half way back to normal. Given the competence of the current administration, it’s hard to think that the pandemic won’t be increasingly under control as the year progresses. The removal of the prior administration’s growth-inhibiting measures will presumably add an extra tailwind. So my guess is that the bond market will pretty steadily head for 3%. This is a headwind for both stocks and bonds. In the case of stocks, though, the anticipation of strong profit growth will act as a counterweight. This is another reason the stock market is gravitating toward consumer cyclicals, where the greatest positive growth surprises are likely to come from.