Stocks don\’t always outperform bonds

No, really, they don\’t:

A 30-year stock market excess return of approximately zero is a huge disappointment to the legions of “stocks at any price” long-term investors.But it’s not the first extended drought. From 1803to 1857, U.S. equities struggled; the stock investor would have received a third of the ending wealth of the bond investor. Stocks managed to break even only in 1871. Most observers would be shocked to learn there was ever a 68-year stretch of stock market underperformance. After a 72-year bull market from1857 through 1929, another dry spell ensued. From1929 through 1949, stocks failed to match bonds,the only long-term shortfall in the Ibbotson time sample.

While this is true, it\’s not what we\’re normally told is it?

However, there is actually a simple explanation for this. Those two periods mentioned are the only two periods when there\’s been serious deflation in the US price level. (Well, 1857 to 1871 also included the world\’s bloodiest war up to that time, not something likely to really boost a stock market).

Check that out here.

And there\’s nothing really very surprising about bonds performing well when you\’ve got negative inflation. They are, after all, denominated in nominal money, while returns to stocks are going to be in real money.

Which leads us to an interesting thought about the future. Bonds will be a just great investment if you think we\’re going to have deflation. It\’s what has given Japanese investors in Japanese Govt bonds rather nice 3-4% real returns in recent decades, even as nominal interest rates are around zero.

Hands up all those who think that the US or UK governments, delightful people though they be, are going to deliver stable or falling general price levels anytime soon? Quite. Stocks and shares it is then.

2 comments on “Stocks don\’t always outperform bonds

  1. Stocks outperforms bonds because the risk is higer. By definition this means that bonds must sometimes outperform stocks. Otherwise te bond market would not exist

  2. Stocks outperforms bonds because the risk is higer. By definition this means that bonds must sometimes outperform stocks. Otherwise te bond market would not exist

    That’s just such a perfectly beautiful specimen of complete, sheer economic ignorance it’s actually quite breath-taking.

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