What if the Stock Market Were a Bond?

Here’s an update to one of my more off-the-wall ideas. I was curious to see what the historical performance of the stock market looks like, but in the form of a bond.

Crazy? Let me explain.

I took all of the historical market performance of the Wilshire 5000 (including dividends) and invented a hypothetical long-term bond that matched the market’s daily gains step-for-step.

I assumed that it’s a bond of infinite maturity and pays a fixed coupon.

There’s one hitch, though. I had to choose a starting yield-to-maturity for the beginning of the data series in December 1970. So this isn’t a completely kosher experiment because the starting point is based on my guess.

If I chose a number that’s too high, the historical performance wouldn’t be able to keep up and the yield-to-maturity would grow higher and higher and soon leave orbit. Conversely, if my starting YTM was too low, the yield would gradually get pushed down to microscopic levels.

Fortunately, the data made my job easy. After four decades, the window I had to work with is pretty narrow. Starting with 10% is too high and 8% is too low. After playing with the numbers, I finally settled on 8.93%.

Even though this “bond” is completely make-believe, it reflects what the actual stock market really did for the past 47 years. It’s the same old stock market but it’s expressed in the form of a bond. Through yesterday, the “bond’s” yield stood at 4.65%.

Here’s what the actual stock market looks like, expressed in the form of a bond. For comparison, I added Moody’s AAA Bond Index (in red). That series starts in 1983.

It’s been more than ten years since the red line was higher than the blue. This is why I often say that the math still favors stocks. When you hear people say that the stock market is expensive, you have to wonder “compared to what?” Lower bond yields are tough competition for stocks and that ought to raise valuations.

Posted by on January 23rd, 2018 at 10:03 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.