One thing to consider is that during some of the time periods under discussion there were no central banks--e.g., the US Federal Reserve "was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics (particularly the panic of 1907)..." (wikipedia)
And even then that was not a magic wand--central bankers had to learn how to be central bankers, and it's arguable when they started to get the job down over the last 112 years. Paul Volker might have been the first to actively take the bull by the horns. I think Bernanke, who studied the great depression, handled the 2009 crisis well (tho it was touch and go in many ways), and Powell helmed the pandemic as well as anyone could have. And tho this paragraph is US-centered, the idea that central banks have gotten better at what they do could be applied elsewhere (or not...).
So one thing that may be related to the outperformance of equities post WWII is that central banks have provided an environment for that, whereas pre-WWII those banks were just getting started, or, in the 19th century didn't even exist.
This post-WWII period has also been a relatively peaceful period--two world wars in the few decades just preceding it, along with the 30s, which were pretty disastrous economically in many parts of the world.
And the 19th century? I googled it just to see, and
this wikipedia list is
awfully long. What was the impact of all those wars on the comparative bond/equity returns then--compared to the last~75yrs of relative peace?
Finally, there's one section in the original link, above that says:
Perhaps the most interesting conclusion of Anarkulova, Cederburg, and O’Doherty was that “Americans could realize trillions of dollars in welfare gains by adopting the all-equity strategy.” In his article “Why Not 100% Equities” in which he discussed several problems with the paper, AQR’s Cliff Asness noted: “Equities are already 100% owned. If some investors read this ‘new’ paper and decide to buy more equities, they have to buy those equities from other investors. This can force the price up, and the expected future return down, but everyone can’t suddenly have double the normal amount of equity dollar return out of thin air. Claiming there are trillions being left on the table is really just noneconomic hype.”
I can't quite put my finger on it, but there's seems to be view in that that equities are a zero sum game. Companies come and go, bankruptcies and IPOs. They can issue more shares (dilution), or buy their own shares back. How many of the
Nifty Fifty maintain their past stature (or even exist) today? (a lesson for the magnificent 7)
Implied in the paragraph I just quoted is something like, 'but the bond market doesn't behave like that--it's different.' Well, the US government is issuing
an awful lot of bonds these days, and budget-wise the US seems to have at least approached the line--across which lies default--a few times recently. Sure, default would bring down equities, too, but would stocks, or bonds, best rise out of the ashes?
My two cents for the evening...
