We first published this document in November 2005 during a period of healthy markets and around the peak of the US housing bubble. The main conclusion from the note was that we had just been through an unparalleled period of returns in all asset classes.
Indeed the 25 year period around 1980-2005 saw stunning returns for Corporate Bonds, Government Bonds, Property and Equities alike. However the starting point helped facilitate such supersized returns. In 1980 the
yield on the 10-year US Treasury was 12.43%, the P/E ratio on the S&P 500 was below 10 and BBB spreads were +274bps. Looking at longer term averages for these asset classes, those starting points provided plenty
of potential for future performance.
However as 2005 was drawing to a close all these asset classes were at valuations notably above their long-term averages. The mean reversion exercise in the piece suggested a much more sober period ahead for absolute total returns in risk assets with negative real returns likely in the second half of the decade in US Bonds, Equities and Property if they mean reverted back to their long-term averages.