Over the long term, we are always told, equities are the best bet. But the long term can be much longer than investors might expect. Even over periods of more than ten or 20 years, the picture can be skewed by “unusual returns”, says the Credit Suisse Global Investment Returns Sourcebook. The annual publication, written by Professors Elroy Dimson, Mike Staunton and Paul Marsh of the London Business School, examines asset returns for 19 markets since 1900.
For stocks, the last two decades were both unusual. Two savage bear markets in 2000-2010 left annualised inflation-adjusted returns in British stocks flat between 2000 and 2010, while US returns fell by 1.2% a year. Returns in the 1990s, however, were a respective 11.2% and 14.2% a year. Go back to 1900, and the figures fall to 5.3% and 6.3%.
It’s also interesting to note that the longest drought for American equities in history lasted 16 years (1905-1920), when they slid by a cumulative 7%. In Britain, stocks fell by 4% from 1900 to 1921. In France, ‘the long term’ can mean a lifetime. Equities there declined in real terms between 1912 and 1977.
But the most striking aspect of the report is how unusual recent bond returns have been. Since 1900, they have vastly underperformed stocks. Here, for instance, their real annualised return has been just 1.4%. For the world as a whole (an index combining the 19 countries, expressed in dollars), equities have outperformed bonds by 3.8% a year. Globally, bonds have gained just 1.6% a year since 1900.
But from 1982 to 2008, global bonds gained 649%, or 7.7% a year. That was such an impressive performance that it actually left bonds marginally ahead of stocks in the 40-year period between 1969 and 2008. Yet “a period as long as 27 or even 40 years can be deeply misleading if naively extrapolated”. Hoping that bond returns will henceforth match the post-1982 period “is a fantasy”.
The early 1980s saw central banks squeeze inflation out of the system, setting off a “golden age” of falling inflation and interest rates. Bond yields slid as prices rose (see chart). This is “unrepeatable”, as the report points out. With inflation looking likely to return, and interest rates nowhere to go but up, today’s historically high bond prices (and low yields) are unsustainable.