Well, the worst day of the year for the stock market was followed by, basically nothing. Neither day had much in the way of new fundamental information, and on Thursday stock futures are higher. Animal spirits are as important as hard logic sometimes.
Thursday also saw the release of the Credit Suisse Global Investment Returns yearbook, produced by financial historians Elroy Dimson, Paul Marsh and Mike Staunton. It has the record of returns from equities, bonds, cash and currencies for 35 countries, stretching back to 1900. There is also data covering a total of 90 countries, including the most recent addition, Bosnia and Herzegovina, with data going back to 2011.
First, to the numbers: Over the last 123 years, global equities have returned an annualized return, adjusted for inflation, of 5%; that’s better than the 1.7% real return for bonds, and the 0.4% return for Treasury bills. The best country for inflation-adjusted annualized stock-market returns in U.S. dollar terms since 1900 has been Australia, with a return of 6.43%, though the U.S. is just behind at 6.38%. Equities have outperformed bonds, bills and inflation in all 35 countries where the researchers have data for 123 years.
On the day’s subject du jour, they said that once inflation goes above 8%, it takes multiple years to return to target, citing recent research. Equities do not provide a hedge against inflation, as they found and as 2022 returns showed. And historically, the returns on stocks and bonds have been much lower during hiking cycles than easing cycles.
The researchers also studied commodities: commodities have had a low correlation with equities and a negative correlation with bonds, and provided a hedge against inflation, but they note the investable market size is quite small, making large allocation increases difficult.
Onto the future — they estimate the equity risk premium to bills will be around 3.5%, which is lower than the historical figure of 4.6%. But that still means equity investors should double their money relative to short-term government bills in 20 years. They note that in thinking about future returns, real returns tend to be better in times of higher interest rates than lower rates, citing data over an impressive 2,487 country-years .
They project that for Generation Z will see roughly the same return in stocks as millennials have, but much worse bond returns. Baby boomers, Marsh told a journalist on a call, “just got lucky. I don’t think we will ever return to that.”
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The economic calendar includes weekly jobless claims and the first revision to fourth-quarter GDP numbers, while Atlanta Fed President Raphael Bostic and San Francisco Fed President Mary Daly are set to deliver remarks. Treasury Secretary Janet Yellen, in India for the G-20 finance minister meeting, said the global economy is in a better place than it was just a few months ago.
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