A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

FOUR ERAS OF FINANCIAL
MARKET RETURNS
Let’s now study four recent periods of stock- and bond-
market history and see whether we can make sense of how
investors fared in terms of the determinants of returns
discussed above. The four eras coincide with the four broad
swings in stock-market returns from 1946 to 2009. The table
below indicates the four eras and the average annual returns
earned by stock and bond investors:
AN ERA VIEW OF U.S. STOCK AND BOND RETURNS
(AVERAGE ANNUAL RETURNS)

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Era I, the Age of Comfort, as I call it, covers the years of
growth after World War II. Stockholders made out extremely
well after inflation, whereas the meager returns earned by
bondholders were substantially below the average inflation
rate. I call Era II the Age of Angst. Widespread rebellion by
the millions of teenagers born during the baby boom,
economic and political instability created by the Vietnam
War, and various inflationary oil and food shocks combined
to create an inhospitable climate for investors. No one was
exempt; neither stocks nor bonds fared well. During our third
era, the Age of Exuberance, the boomers matured, peace
reigned, and a noninflationary prosperity set in. It was a
golden age for stockholders and bondholders. Never before
had they earned such generous returns. Era IV was the Age of

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Disenchantment, in which the great promise of the new
millennium was not reflected in common-stock returns.
With these broad time periods set, let us now look at how
the determinants of returns developed during those eras and
look especially at what might have been responsible for
changes in valuation relationships and in interest rates. Recall
that stock returns are determined by (1) the initial dividend
yield at which the stocks were purchased, (2) the growth rate
of earnings, and (3) changes in valuation in terms of price-
earnings (or price-dividend) ratios. And bond returns are
determined by (1) the initial yield to maturity at which the
bonds were purchased and (2) changes in interest rates
(yields) and therefore in bond prices for bond investors who
do not hold to maturity.