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Capital Markets

Davos: The great equities comeback

After more than two decades of unusually strong bond returns and more than a decade of sub-par equity returns, the tables have started to turn.

The spread between the S&P500 and the Barclays long-term US treasury bond total return indices turned positive in 2012, consistent with trends in other important markets. The transition is likely to continue, supported by an improving global economic outlook.

After an era of deleveraging, sub-par economic growth, financial flare-ups and a global absence of confidence, we are entering an economic environment that’s more normal at least, and quite likely better than normal. The post-2000 secular bear market appears to be giving way to a new secular bull market.

From the secular low year of 1982 until the peak year of 2000, the US equity benchmark gained at least 15% in 12 of the 18 years, gaining more than 20% in each of the period’s last five years. But during the nine years from 2000 through to 2008, it gained 15% only twice, with the US bond benchmark outperforming it in six of those years. Since 2009, however, equities have returned to earlier form, gaining at least 15% in 2009, 2010, and most likely 2012 as well, beaten by bonds only once.

The environment has been changing in ways that are conducive to long-term equity outperformance.

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