NCPA - National Center for Policy Analysis

Stocks May Not Have Advantage over Bonds

March 7, 2003

While we have lived our entire adult lives with the comfortable idea that stocks always beat bonds and that it takes the real return on stocks to stay ahead of inflation, some new research indicates otherwise, according to financial analysts Lacy H. Hunt and Van Hoisington.

Their research began when they were asked two questions: Can the postwar returns on stocks and bonds be repeated? And what factors influenced the risk premium (the amount of additional interest investors require to buy a riskier financial instrument)?"

They found:

  • In most periods, including 1871, 1900, 1926 and 1946, stock dividend yields were higher than bond yields.
  • But today, stock yields are lower than bond yields -- in 2001 stocks yielded 1.5 percent while bonds yielded 5 percent, a 3.5 percent difference.
  • Worse, stocks have recently been selling at the highest price-to-earnings ratios (the ratios of earnings to a stock's given price) in history, 34 to 1 in 2001."

What does the future hold? If history is an indication, stocks won't be providing the returns most investors have grown to expect as "normal," say the authors.

Source: Scott Burns, "Another nail in the equity coffin? New research shows stocks may not have advantage over bonds," Dallas Morning News, March 4, 2003.


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