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Global Strategy

The Longest Pictures

A picture guide to financial markets since 1800 The Longest Pictures illustrate long-run trends in financial markets.

We plot almost 100 charts on asset price returns, correlations, volatility, valuations and many other market and macro factors for the US, UK, Europe, Japan and Emerging Markets.

Investors can view US equity prices since 1871, Dutch bond yields since 1517, the oil price since 1861, risk premia since 1900 and German dividend yields since 1869 among many other charts.

The study shows the historical significance of todays asset markets with 2012 seeing multi-century lows in government bond yields in Developed Markets, the cheapest European equities since the 1920s and the conclusion of the greatest US real estate bear market since the early 1990s.

Secular trends in bonds, equities and other asset classes allow us to advise what the long-term contrarian investor should do. We believe a secular contrarian should be buying Equities, European assets, Japan and Financial & Telecom stocks and selling Gold, Bonds, Emerging Markets and Resources & Consumer Staples stocks.

We nonetheless remain of the view that the catalyst for a decisive change in secular market leadership (or Great Rotation) awaits a good bear market in bonds caused by real estate, labor and banking markets ending the current Era of Deleveraging (Chart 1).

Chart 1: Equity prices & bond yields since 1900

1.5

3.55.5

7.5

9.5

11.513.5

15.5

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

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10

100

1000

10000

100000

Long Term Treasury Yields DJIA (right hand scale)

2%

14%

2.5%

5%

Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Haver

Equity Strategy

Equity Strategy | Global 27 June 2012 (Corrected)

Michael Hartnett Chief Global Equity Strategist MLPF&S Kate Moore Global Equity Strategist MLPF&S Brian Leung Global Equity Strategist MLPF&S Swathi Putcha Global Equity Strategist MLPF&S

Click the image above to watch the video.

Table of Contents Asset prices & interest rates 5 Long-run equity returns 29 Long-run fixed income & commodity returns 32 Returns of US assets by decade 37 Risk, volatility, correlation & valuation 48 Ownership & market composition 69 Growth, demographics & debt 87

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1.45%: the yield of US 10 year Treasuries on June 1, 2012; a 220-year low

1958: the last time US AAA corporate bond yields were this as low as they are today

1517: Dutch government bond yields currently at lowest level in almost 500 years

320bps: the current spread between European dividend yields and German bund yields, an all-time high

63x: the amount EM equities are up since the late 1960s

$1900/oz: record high gold price reached in September 2011

43%: the drop in US real home prices since the 2006 peak, making the current US real estate bear market the greatest since 1921

8%: Japans share of global equity market cap; close to an all-time low and down from 44% in 1988

$3,642,000: What $1 invested in US large company stocks in 1824 would be worth today with dividends reinvested

1 out of 2: the number of years since 1871 that the S&P 500 has had a negative real price return in

44%: the share of US Treasuries owned by foreigners; up from just 1% in 1945

280mn: the number of people Indias working age population will grow by over the next 25 years; this is more than the current working age population in the US and Germany combined

The long-run in numbers

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The long-run in words

Those classes of investments considered best change from period to period. The pathetic fallacy is what are thought to be the best are in truth only the most popularthe most active, the most talked of, the most boosted, and consequently, the highest in price at that time.

-Fred Schwed, Where are the Customers Yachts?

History does not repeat itself but it does rhyme.-Mark Twain

The four most dangerous words in investing are This time its different.

-John Templeton

There are no new erasexcesses are never permanent.

-Bob Farrell

The average long-term experience in investing is never surprising, but the short term experience is always surprising.

-Charles Ellis

We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.

-Warren Buffett

Buy on the cannons, sell on the trumpets.-Old French Proverb

Buy when theres blood in the streets.

-Baron Rothschild

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The long-run in years

*Figures are based on annual total returnsSource: BofA Merrill Lynch Global Equity Strategy, Ibbotson, Dimson, Marsh, and Staunton, Triumph of the Optimists, Haver

1602: the Dutch East India Company becomes the first company to issue stocks and bonds on the Amsterdam Stock Exchange

1685: Germany establishes the second stock exchange in the world

1790: an $80 million U.S. Government bond offering to refinance Revolutionary War debt becomes the first publicly traded security in the US

1792: the NYSE is organized and the Bank of New York becomes the first company listed

1810: Russia is the first emerging market country to establish a stock market

1879: US stocks record their best year ever, returning 57%*

1891: the first US equity bear market (>20% loss) is caused by the Baring Brothers Crisis

1918: US Inflation hits an all-time high of 20.4%

1931: US stocks record their worst year ever, declining 43%*

1932: the most volatile year ever for US stocks as volatility hits 68%

1981: monthly US 10 year Treasury yields hit an all-time high of 15.8%

1982: the best year of total return for long-term Treasuries of 40%*

1987: on Black Monday, October 19th, the Dow falls 23%, the largest daily drop ever

2009: the worst year for long-term Treasury returns with losses of 15%*

2012: a year marked by multi-century lows in many DM government bond yields (including the Netherlands, France, US)

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Bond yields & equities in the long-run

The Dow Jones Industrials & long-term US Treasury yields back to 1900.

The chart shows equities are in their 4thsecular trading range while bonds are enjoying their 2nd great secular bull market of the past 110 years.

Every equity breakout from a long-run trading range has coincided with a secular inflection point in the bond market.

This was the case after WWI, after WWII, and during the war against inflation in the early 1980s.

A new secular bull market in equities in coming years therefore requires a secular bear market in bonds and a good rise in interest rates. Monthly data

Source: BofA Merrill Lynch Global Equity Strategy, Bloomberg, Haver

Equity prices & bond yields since 1900

1.5

3.5

5.5

7.5

9.5

11.5

13.5

15.5

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

1

10

100

1000

10000

100000

Long Term Treasury Yields DJIA (right hand scale)

2%

14%

5%

2.5%

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US equity prices since 1824

In the long-run stock prices rise.

$1 invested in US large company stocks in 1824 would be worth roughly $376 today in nominal terms.

An even better stat for the bulls: $1 invested in US large company stocks in 1824 would be worth close to $3,642,000 with dividends reinvested, illustrating the power of compounding.

When were the great equity bull markets?

1860-1872 = 332% total return

1920-1928 = 423% total return

and (the greatest of them all) 1982-1999 = 1654% total return

Annual data. Shading denotes great bull marketsSource: BofA Merrill Lynch Global Equity Strategy, Ibbotson

US large company stock total returns, log scale

$0

$1

$10

$100

$1,000

$10,000

$100,000

$1,000,000

$10,000,000

1824 1839 1854 1869 1884 1899 1914 1929 1944 1959 1974 1989 2004

Log

Scal

e

1654%

423%

332%

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US equities since 1871 in real terms

*U.S. large company stock market returns, logarithmic values of real monthly average price returnSource: BofA Merrill Lynch Global Equity Strategy, Robert Shiller, Ibbotson

Long-run stock prices adjusted for inflation illustrate a more nuanced picture of equity returns.

Two good stats for the bears. First, the S&P 500 has had a negative real price return in nearly 1 outof every 2 years since 1871. Second, equity prices in real terms last peaked in August 2000; after prior secular tops in 1907, 1929 and 1968, stocks took 20-30 years to recover back to their old highs.

S&P 500 Real P