Looking (Really) Long Term, This Data Suggests Stocks Should Still Beat Bonds

Looking (Really) Long Term, This Data Suggests Stocks Should Still Beat Bonds
Andrew Rummer

about 2 years ago1 min

Sometimes it pays to stand back from the daily swings of the markets and look at the long term. And as 2022 gets underway, one key valuation metrics suggests stocks should perform better than bonds over the coming decade. 

The chart above shows how the returns on stocks relative to bonds (in green) have tended to increase with the cyclically adjusted price-to-earnings (CAPE) ratio relative to the yield available on bonds (in blue). 

CAPE is a measure developed by Yale professor Robert Shiller that puts a valuation on the stock market by dividing prices by the profits generated over the previous 10 years, in order to flatten out the peaks and troughs of the economic cycle. The blue line in the chart takes this concept a step further by inverting the CAPE ratio to create a CAPE earnings yield and then subtracting the yield available from investing in US government bonds – a metric Shiller calls the excess CAPE yield.

Historically, the higher this excess CAPE yield, the greater the returns of stocks relative to bonds have been over the following decade. 

The current level of the excess CAPE yield, at about 3%, is hardly shooting out the lights. But it does suggest that stocks should at least return more than bonds over the coming 10 years. 

Bear in mind, however, that this doesn’t guarantee that stocks will go up in absolute terms. Both stocks and bonds could fall, but bonds could fall faster.

Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG