It’s Like the Financial Crisis Never Happened…
Posted by hkarner - 24. Februar 2017
Source: The Economist
A decade since the U.S. subprime crisis began, and everything’s wonderful on Wall Street
A decade after the world began to notice the losses on derivatives linked to the toxic waste of structured subprime mortgages, American stocks have produced such big returns that the biggest crash in generations barely registers.
The 10-year average compound return on U.S. shares was 4.9% a year after inflation at the start of 2016, only slightly below the average for world stocks since the end of the Gilded Age in 1900, according to calculations for Credit Suisse by Elroy Dimson,Paul Marsh and Mike Staunton of London Business School.
The same isn’t true for the rest of the world. British stocks made only 3% after inflation, including dividends, in the past decade, while real Japanese returns were barely positive and French shares delivered less than 2%. German stocks weren’t quite so bad thanks to its export powerhouses, and their 4.3% return adjusted for inflation is in line with the very long-term return from the world outside the U.S.
This global divergence is covered up by the record highs of global stocks in the past week. On Wednesday morning in London the MSCI All-Country World index was setting another new high after breaking the 2015 high a week ago.Look below the headline, and the high is all about the U.S., which makes up more than half of the market value of the global benchmark. Japanese, European and emerging-market stocks all remain below their postcrisis highs, let alone their precrisis highs, in both dollars and local currency.
Delve into the figures and American shares lose some of their shine—although the rest of the world still looks worse. U.S. stocks only beat bonds by 0.3 percentage point a year over the past decade, with dividends and coupons reinvested, far below the long-run global average of 3.2 points a year. That is a paltry reward for the extreme volatility of holding on to risky shares through a crash that wiped out more than half of the S&P 500’s value.
British, French, German and Japanese shares were all even worse, with their country’s bonds beating local stocks over a decade. Returns on British long-dated bonds are ahead of the FTSE 100 since the Big Bang deregulation of the London stock market in October 1986, while Japanese 10-year bonds—big winners from deflation—beat Japanese shares since at least 1983.
The return on U.S. shares looks better by comparison, but was still worse than the long-run U.S. average of 6.4% a year. Mr. Marsh points out that the U.S. long-term performance is helped by being one of the “lucky countries” not to have been occupied by a foreign power. Other countries beating the world average since 1900 include the U.K. and Sweden, as well as resource-rich Canada, New Zealand, Australia and South Africa.
Mr. Marsh argues that future returns are likely to be lower than in the past. He expects long-term returns, again including dividends and adjusted for inflation, to be below 4% in all the major markets, based on a premium above cash of 3% to 3.5% for holding equities. Because cash, measured by short-term government bills, yields so little, the base is low.
“If you look just at the U.S. [history], you’re exaggerating the returns investors could earn world-wide and you’re almost certainly exaggerating the return Americans can look forward to as well,” he said.
This seems overly harsh; world stocks produced a higher premium over cash from 1900 to now even taking into account two world wars and the 1917 and 1949 confiscation of Russian and Chinese shares, which once constituted a decent chunk of the global market.
It is true that the global order is looking shaky and trade is under attack, while demographics are less supportive of the economy than before. It is also true that U.S. stocks in particular stand at high valuations today, making future gains harder. But the real stock-market lesson of the past century is that the key to solid performance is to avoid dictatorship or a catastrophic war. Fingers crossed.