Equity prices & bond yields since 1900


I don’t often give props to big Sell Side firms, but today I must make an exception. Merrill Lynch’s Equity Strategy group put out The Longest PicturesPicture Guide to Financial Markets Since 1800 this week. Its a 102 page doozy looking at every asset class and country going back through the history of time. It illustrates a variety of long-run trends in financial markets.

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

I am in concurrence with this perspective:

“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.”

In other words, until this secular bear market ends — perhaps with the Bond market cracking — expect contained equity markets and modest returns.

I cannot give out their copyrighted work, but you should definitely get your hand on this if you can (surely you know someone who works at BofA/Merrill?).

Nicely done.



The Longest Pictures
Michael Hartnett, Chief Global Equity Strategist
BofA Merrill Lynch 27 June 2012

Category: Analysts, Investing, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “Picture Guide to Financial Markets Since 1800”

  1. [...] The stock market needs a good, old fashioned bond bear market.  (Big Picture) [...]

  2. mathman says:

    Wow, that graph has about the same trajectory as civilization! Let’s go out and kill off some more species! WOO-HOO!

  3. rd says:

    Here is what I see in this graph:

    1. After a period of depression, interest rates are low and so is economic activity and employment;
    2. So, the economic activity and employment start to pick up steam which starts to drive interest rates and stock prices higher;
    3. After a time, economic activity begins to become more haphazard but inflation expectations continue to drive interest rates higher. Stocks begin to flatline because the fundamentals don’t justify higher prices and bonds become very attractive instead;
    4. Eventually, the wheels start to really fall off the economic wagon because of increasing imbalances almost everywhere – stock market is still flatlining over a long period (with periodic cyclical bears and bulls) and interest rates decline to try to restart the economic and employment engine; and then
    5. Cycles back to the first point.

    I think we will see interst rates start to rise with a bond bear market when economic activity begins to really pick up again. Could still be a few years out.

  4. Silversem says:

    1980 levels in Treasuries can be seen again in a few years i am sure. Gold will go ballistic when that happens! Just like in 1980.

  5. mathman says:

    Don’t look now but da place is boin’n up (keep an eye on this for the next week or so):


  6. VennData says:

    By ‘ballistic’ you mean collpased, of course.
    You’ll be able to buy that gold back much cheaper.

  7. Sunny129 says:

    My 2 cents:

    - Consumer credit in 1970 was 1 Trillion but grew to 50 Trillions by 2000, again increased by zrp of 1% and again by 0.25% by Ben & Co. Now we are DE_LEVERAGING phase!

    - Since 2008-’09, 18 TRILLIONS ( 10 T by western and 8 T by Emerging Countries ) have been thrown to prop up Markets/Economy but the Economy is struggling!? That’s nearly 1/3rd of World’s GDP down the drain!

    - Credit contraction, decreased M2 supply and NO velocity of money inspite of ZRP of 0.25% in USA and 0.1% in Japan

    - DEBT has to be addressed FIRST. Inflation is 2.7% but 10 yr bond yield is 1.7%!

    So Deflation or de-inflation is taking hold. Invest accordingly!

  8. [...] Source:  Merrill Lynch via The Big Picture [...]

  9. kaleberg says:

    If you have a BoA / Merrill Lynch retail account you can find the report by going to Research & Insights > Research Library, then using the Search box with the Research Reports to search for 1810. Not easy, but you should have access. It reminds me of the old Merrill, Lynch, Pierce, Fenner & Smith with their rather eclectic “Fables for the Very Rich and Those Who Would Like To Be”.

  10. lalaland says:

    Anyone have any idea how the Fed’s QE is balancing out the flight to safety? Should real yields be higher or lower than 2.5%? Also, if growth does start taking off might want to take your money off the table after yields hit 5% and put it back on the table after they peak and head back down.

    Also – what happened between 1800 and 1900?

  11. philipat says:

    One of the BR Investment rules “Be aware of the long cycles”.

    Especially if you want to buy and hold!!

  12. philipat says:

    Business Insider concludes that this chart demonstrates we are on the verge of another huge Bull market:


    That’s a little premature, I would have thought?!!


    BR: Especially if you note that prior cycles tend towards > 10 years

  13. philipat says:

    Yes. In fact they average is 18 years. And this one will probably be at least that because we are in a de-leveraging balance sheet adjustment. So there’s at least another 6 years of this IMHO.

    Where’s the Kool-Aid??

  14. gkm says:

    People simply do not get the relationship between interest rates and money supply. This chart helps to highlight this.

    When interest rates rise that pushes money into the economy. Hence, the subsequent bubbles of the 1920′s and 1990′s in the equity markets. Then you have a period of stagnation which always follows.

    People look at the post WWII period as THE model for what will happen when interest rates rise but it’s the anomaly. You had a period of unprecedented global destruction and then a massive rebuild of infrastructure and population. Growth as a result of so much loss.

    The real question is what will become of the money that is being pushed out by the high interest rates in Europe. Follow that money and you’ll find the next big investment.

  15. DMR says:

    Good inflation, bad inflation, good deflation, bad deflation. Rinse and repeat. :)

  16. san_fran_sam says:

    This comment is kinda late in coming but….

    I don’t understand the conclusion I am supposed to draw from this chart.

    The four highlighted periods for the Dow I take as being the stagnant periods. During the first one, Long Term Treasury yields rose. During the second, they fell. During the third they rose. During the fourth and current period, they rose.

    During the periods between the stagnant Dow they fell, rose, and fell respectively.

    And in the last 30+ years, yields have consistently fallen while Dow has a bull period and a stagnant period.

    So what the heck is going on?

  17. gkm says:

    Sam, you can’t look at this chart and think there should be a one-for-one relationship. For one thing changes in valuations don’t happen contemporaneously in any two asset classes because there are many more asset classes and geographic regions. Wealth is built as the differential valuation between assets known as the Cantillon Effect You may want to consider this chart http://www.ritholtz.com/blog/wp-content/uploads/2012/04/bla3.png as another piece to the puzzle and note the correlations or lack thereof. Also note the lack of movement in bond prices in the last commodity cycle. This is a divergence. Something has changed and speculation is the name of the game.

  18. eliz says:

    @ san_fran_sam: I was just about to leave the same observation. It seems to me that inferring something from this graph is like a Rorschach test – it tells us more about the person than the graph! :-)

    @ gkm: I’ll agree with you that something has changed.

  19. [...] Era of Deleveraging Ends with “Great Rotation”: Long-Term Trends in Financial Markets Si… Looks at every asset class & country since 1800, “the catalyst for a decisive change in [...]

  20. dancingdiva says:

    Thank you andrewp111 for the link. Made for a great read.