Note to Self: Characteristics of Stock and Bond Returns since 1870
Any approach that postulates that the expected equity return premium of stocks over long government bonds or the expected real return on long government bonds is constant when compared across long periods is almost surely a bad idea. Here are the stock and bond reinvested portfolio accumulations:
And here is the ratio:
However, the assumption that, generation upon generation, the expected long-term stock return is nearly constant at about 6.7% per year is not a terribly bad one. The long-term funkiness comes in the bond return and in the spread. (The medium-term funkiness comes in episodes of irrational exuberance that push prices high above standard earnings multiples—cough, 1929, 1966, 1999, and perhaps 2020?—and irrational panic that push prices far below them—1932, 1982, 2009.)
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Housekeeping:
