Asset Returns in the Long Run

Abstract

The author investigates the factors likely to drive financial asset returns over the long run. He concludes that the stellar returns investors achieved in recent decades are unlikely to be repeated. Bond returns were buoyed by surprisingly sharp disinflation that should not be expected to recur. For equities, the increases in valuations that turned reasonable earnings growth into spectacular returns should not be counted on again either. Equivalently, the premium needed to induce people to hold equities instead of less risky assets will likely be much lower in the future than the actual realized premium has been in the past.