Capital Markets: Observations and Insights Autumn 2019

Many Happy Returns? ​ Lending vs. Owning

LENDING vs. OWNING

• There is a strong relationship between starting valuation and ensuing 10-year returns for both stocks and bonds

‒ Current valuations suggest equities should outperform bonds over the coming decade

Treasury Bond Yield vs. U.S. Aggregate Bond 10-Year Returns

= month

S&P 500 P/E vs. 10-Year Returns

= current

25%

12%

R² = 0.90

R² = 0.84

20%

10%

15%

8%

10%

6%

5%

4%

0%

2%

-5%

0% 10-Year Annualized Return

5x

10x

15x

20x

25x

30x

1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

S&P 500 10-Year Annualized Return

S&P 500 Price/Earnings

Bloomberg Barclays U.S. Aggregate Bond

10-Year Treasury Bond Yield

Source: FactSet. Each dot represents the P/E during that month and the returns generated over the subsequent 10 years. The starting P/E ratio is the price divided by the next 12- month earnings per share estimate at the start of each 10-year period measured. Monthly data through September 2019 and beginning in January 1986. R-squared is a statistical measure used to analyze how differences in one variable can be explained by the difference in a second variable. The performance data quoted represents past performance, which is not an indication or a guarantee of future results.

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