• TINA is an acronym which stands for ‘There Is No Alternative’, commonly used to describe investor choices when equities were the only asset class delivering interesting returns versus all other asset classes.
• Now that the Federal Reserve (the “Fed”) is raising interest rates and reducing the size of their Balance Sheet (aka Quantitative Tightening), alternatives to investing in equities are becoming more attractive.
• While it is sad saying ‘goodbye’ to TINA, it does give investors the opportunity to make new friends (asset classes other than equities) with the potential to positively compliment their relationship with equities.
TINA was a great friend: loyal, reliable and most importantly always a good time. In fact, TINA was not only the best of friends, TINA’s friendship delivered great times for over a decade and got better over time. For the average investor there was no better friend to have than TINA.
Of course, TINA isn’t a real person, rather the idea that in a world with few investment options available to generate acceptable returns, investors had only one real choice: equities. However, it didn’t start out that way and has not always been the case. After the Global Financial Crisis (GFC) the Fed’s policy of keeping interest rates extremely low pulled yields down and pushed bond prices up. Over that period more and more investors concluded that the risks associated with investing in bonds and real estate outweighed the potential low single digit returns.
Inflation and the Fed’s response to lower inflation changed everything.
TINA was indeed a very good friend to equity investors
Just how good of a friend was TINA? Over the decade between 2011 and 2021 the S&P 500 had only one negative return year – down 4.38% in 2018 – and ended the decade with incredible performance up 31.49% in 2019, 18.4% in 2020 and 28.71% in 2021.1 Over the entire decade annualized returns were 13.08%, significantly higher than the very long-term trend rule of thumb of about 7% for equities. TINA was a very good friend to equity investors indeed.
Even more to the point, what was the alternative? Over that same 10-year period from 2011 to 2021 the yield on the US Government 10 Year Treasury – often portrayed as the standard benchmark risk-free asset and the primary anchor to bond yields across the fixed income market – fluctuated between 0.31% and 3.26%, averaging a yield of 2.03%. Since pretty much every debt instrument is priced off US Government Treasuries, their yields were also similarly low relative to history.
The impact of Fed policy tightening on yields
High inflation’s arrival in 2021 - or maybe more importantly the Fed’s reacting to high inflation by raising the Fed Fund’s rate and eventually announcing a plan to reduce the size of their balance sheet – changed everything. With the 75 bps hike announced after the latest Federal Open Market Committee meeting on September 21st, the Fed Funds Target is now between 3% and 3.25%. This in turn is pushing yields up across the entire spectrum of maturity and credit risk, providing more interesting yields and potentially higher returns than investors have seen from bonds in years.
A similar dynamic is playing out with real assets where the cost of borrowing to start new projects is rising which in turn slows capacity growth. Slower capacity growth is leading to pricing power for existing capacity and ultimately better returns for investors.
For the first time in many years there are interesting alternatives to equities for investors to consider, which is basically why we’re starting to see people say goodbye to TINA.
Time to add some new friends to the group
That leads us to the primary point of this commentary: the changing investment landscape is presenting investors with opportunities across fixed income and real assets most have not seen for at least the past decade. While these opportunities could continue getting more interesting, now is the time to look at your asset allocation and get familiar with assets you may not have considered for some time.
As humans we look for patterns, it’s in our nature. Once a pattern is established and recognized as successful we’re quick followers. In many ways following TINA has been second nature to most investors, and the current high equity exposures reflect that recognition. However, the world has changed and we’re now in an environment where TINA is no longer true. There are alternatives to equities.
Just because we’re saying goodbye to our good friend TINA doesn’t mean it is forever, nor does it mean it is a complete split. Going forward, equities will likely have a significant place in investor asset allocation strategies. Rather, the end of TINA represents an opportunity to go out and meet new friends you haven’t hung out with in a while.
Friends like Real Estate, Commodities, High Yield Bonds, Investment Grade Bonds, Municipal Bonds and Government Bonds across the yield curve are waiting to be discovered. We think you’ll find that they’ve changed since the last time you’ve spoken and may be far more interesting today than they were ten years ago.
Important Disclosures & Definitions
Source: Bloomberg, as of 12/31/2021
Basis Point (bps): a unit that is equal to 1/100th of 1% and is used to denote the change in a financial instrument.
Fed Funds Target: the target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which the Federal Reserve (the “Fed”) suggests commercial banks borrow and lend their excess reserves to each other overnight.
Federal Open Market Committee (FOMC): a branch of the Federal Reserve System, the FOMC determines the direction of monetary policy by directing open market operations. The committee is composed of the seven members of the Board of Governors and five Federal Reserve Bank presidents.
Great Financial Crisis (GFC): a downturn in the US housing market coupled with loose lending standards created a financial crisis that spread from the United States to the rest of the world through linkages in the global financial system. Many banks around the world incurred large losses and relied on government support to avoid bankruptcy.
S&P 500 Index: widely regarded as the best single gauge of large-cap US equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization. One may not invest directly in an index.
Performance data quoted represents past performance. Past performance is no guarantee of future results; current performance may be higher or lower than performance quoted.
ALPS Advisors, Inc. is affiliated with ALPS Portfolio Solutions Distributor, Inc.
ALPS Portfolio Solutions Distributor, Inc., FINRA Member.