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U.S. stocks have performed extremely well in the past 13 years, but bonds have not. Stock performance is in the top decile of all 13-year periods over the past 96 years. Quantitative easing (QE) has been the driver. What will happen when QE ends?
It’s official. The return in the 13 years following the 2008 stock market crash has been terrific. In this article I examine the history of 13-year returns on stocks and bonds to put the most recent 13-year period into perspective. It has indeed been extraordinary.
A phenomenal recovery
Aside from a quick down blip in the first quarter of 2020, since 2008 the U.S. stock market, as measured by the S&P 500, has skyrocketed, growing approximately 600% when dividends are included. In addition to the steepness of this recovery, it’s the longest recovery on record if you don’t view the 2020 blip as ending the recovery.
It should feel to most investors like this past 13 years is the best ever. It almost was. The following section examines all 85 13-year time periods ending in December.
13-year investment return history
The following exhibit shows all the 13-year returns for stocks. The U.S. stock market, as measured by the S&P 500, returned 600% in the 13 years ending December 2021 (far right bar in the exhibit), which is 16% per year. It ranks nin5h out of 84 13-year periods, so top decile.
The greatest 13-year return was 863%, earned in the 13 years ending December of 1955, averaging 19% per year.
As you can see in the last two bars on the right, moving from 2020 to 2021 replaces 2008’s 37% loss with 2021’s 30% gain, propelling the 13-year return upward.
Returns averaged 323% (12% annualized) over the full history, so the recent return is 185% of average.
By contrast, bond returns have been below average, returning 4.4% per year versus the average 6.6%. Bonds earn their coupon plus capital gains or losses. Falling interest rates generate capital gains, but in this case total returns have been below average because coupons, along with rates, have fallen well below average.
What’s next
Investment returns over the past 13 years have been driven by the QE experiment. Warren Buffett observed that QE is an experiment of magnitude and consequence that has never been conducted before. No one knows how it will end and what its effects will be, but QE will be gradually reduced starting in 2022.
Much of this recovery has been orchestrated by the Federal Reserve with its zero interest rate policy (ZIRP), an cousin of QE. ZIRP has required massive money printing of around $5 trillion to buy up bonds, manipulating their prices above natural levels. But inflation is now forcing the Fed to “taper” -- reduce its bond buying. As the manipulation ends, bond yields will increase, especially if inflation persists, as it likely will.
Increases in bond yields drive bond prices down. It should also drive stock prices down as analysts discount future earning at a higher discount rate, and bonds regain their position as a lower risk alternative to stocks.
The end of ZIRP is the end of stock and bond price manipulation. As Warren Buffett observed, “When the tide goes out, we see who has been swimming naked.” Without this “invisible hand” of monetary policy, stock and bond prices will be determined by investors, as was the case before QE.
Ron Surz is co-host of the Baby Boomer Investing Show, president of Target Date Solutions and Age Sage and CEO of GlidePath Wealth Management.
Watch our Baby Boomer Investing Show and buy my book Baby Boomer Investing in the Perilous Decade of the 2020s.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
A phenomenal recovery 
It should feel to most investors like this past 13 years is the best ever. It almost was. The following section examines all 85 13-year time periods ending in December.
