The global economy’s problematic re-emergence from the Great Recession revived interest in Alvin Hansen’s 1939 secular stagnation hypothesis. Hansen coined the term to refer to the period of low growth prospects during the 1930s, which came on the back of slowing innovation and an ageing population. The parallels between the economic fundamentals of then and the last decade led Larry Summers to surmise that an era of protracted spells of low growth and low (nominal and real) interest rates would ensue. Indeed, rates across maturities have dropped to all-time low levels around the world.
An NBER working paper, ‘Duration-Based Stock Valuation’, adds to the growing literature examining the impact that these discount rate shocks have had on financial markets. Specifically, the author Jules van Binsbergen pays attention to the valuation of long duration assets by constructing several counterfactual fixed income portfolios that match dividend strips of the aggregate stock market. Counter to two anomalies found in the literature, the equity premium puzzle and the excess volatility puzzle, the following results are presented:
Between 1996 and 2020, a fixed income investor would have achieved similar, and likely substantially better, return performance than an investor in the S&P500 index. Expanding the horizon from 1970 to 2020 and to the Eurostoxx, the results remain valid. As such, Binbergen concludes that investors have received little to no compensation for taking long duration nominal dividend risk over the last fifty years.
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