No. of Recommendations: 6
The OP article argues that "over the past 30+ years markets have become less informationally efficient in the relative pricing of common stocks". If the market is getting the prices wrong, there would be more extreme price movements, and so more extreme equity returns. There would be more bubbles with ridiculously high prices, and more busts when the prices return to reality. But the data does not show this. The equity risk premium is within its historical range.
Shiller calculates Real 10 Year Excess Annualized Returns (EAR) (S&P 500 stocks minus 10-year government bonds). The most recent 10 years is at the high end, but below previous booms that started in 1954 and 1944.
Date EAR over the next 10 years
1964.08 -0.5%
1884.08 0.5%
1924.08 0.9%
1874.08 1.2%
1984.08 2.4%
1904.08 2.6%
1994.08 2.7%
2004.08 3.2%
1914.08 3.8%
1974.08 5.6%
1894.08 5.6%
1934.08 6.2%
2014.08 11.5%
1954.08 12.0%
1944.08 12.4%
See the ECY chart in the ie_data download from
https://shillerdata.com/Stocks underperform bonds when there is bad news (war, depression, inflation, GFC). Real returns:
from to bonds stocks avgEAR yrs
1881 1897 6% 4% -2% 17
1912 1922 -3% -5% -2% 10 war
1922 1941 6% 2% -4% 19 depression
1964 1979 -1% -3% -2% 15 inflation
1998 2012 4% -1% -5% 14 GFC
avg avg 2% -1% -3% 15
Stocks outperform when the bad news has passed:
from to bonds stocks avgEAR yrs
1896 1906 0% 11% 11% 10
1917 1931 5% 17% 12% 13 post war boom
1940 1965 -1% 13% 14% 25 post war boom
1990 2000 6% 16% 10% 10 post inflation boom
2008 2024 -1% 11% 12% 16 post GFC boom
avg avg 2% 14% 12% 15
The most recent boom is similar to the previous booms, with stocks outperforming bonds by about 12% a year for about 15 years.
