Stocks and Bonds Returns Since 1802 Shakhnoza Abzhabarova Thapelo Mphoreng Gulbanu Kanybek Chima Dike

CONTENT Introduction Total Asset Returns The Long-term Performance Of Bonds Gold, The Dollar And Inflation Total Real Returns Real Returns On Fixed-income Assets The Continuing Decline In Fixed-income Returns Equity Premium Worldwide Equity And Bond Returns Conclusion

INTRODUCTION Between 1802-1870’s : the most difficult times to collect stock returns, because few dividend data were available and it was approximately 6.9%. From 1871 through 1925: the returns on stocks are calculated using a capitalization-weighted index of all NYSE stocks and are taken from the well-regarded indexes compiled by the Cowles Foundation and reported in Shiller which is 6.6%. 1926 till present: Even since World War II, during which all the inflation that the U.S. has experienced over the past two hundred years occurred, the average real rate of return on stocks has been 7.5 percent per year.

TOTAL ASSET RETURNS Total return includes changes in the capital value plus interest or dividends and assumes that all these cash flows are automatically reinvested in the asset over time.

THE LONG-TERM PERFORMANCE OF BONDS Bonds promise a fixed monetary payment over time. In contrast to equity, the cash flows from bonds have a maximum monetary value set by the terms of the contract and, except in the case of default, do not vary with the profitability of the firm.

Bond series based on long- and short-term government bonds During the Great Depression : short-term interest rates fell nearly to 0 long-term government bonds fell to a record-low 2 %. 1950s and 1960s: Government policy maintained low rates and strict limits (known as Regulation Q) were imposed on bank deposit rates 1970s: Inflation reached double-digit levels

Gold, The Dollar And Inflation

The dramatic changes in the inflationary trend can be explained by the change in the monetary system. During the 19th and 20th early centuries, the US, the UK and the rest of the industrialized world were on a gold standard.

REAL RETURNS ON FIXED-INCOME ASSETS

THE CONTINUING DECLINE IN FIXED-INCOME RETURNS January 1997 - the U.S. Treasury introduced TIPS, or Treasury inflation-protected securities. The coupons and principal from these bonds, backed by the U.S. government, are linked to the U.S. consumer price index, so that the yield on these bonds is a real, inflation-adjusted yield.

THE EQUITY PREMIUM The excess return of stocks over bonds (either long or short) is referred to as the equity risk premium, or simply the equity premium.

Worldwide Equity And Bond Returns Some economists claimed that U.S. stock returns exhibited survivorship bias, a bias caused by the fact that returns are collected from successful equity markets, such as the United States, but ignored in countries where stocks have faltered or disappeared outright, such as in Russia or Argentina.

CONCLUSION: Stocks For The Long-run Over the past 210 years, the compound annual real return on a diversified portfolio of common stock has been between 6 and 7 percent in the United States, and it has displayed a remarkable constancy over time. The superior performance of stocks over the past two centuries might be explained by the growing dominance of nations committed to free market economics.