A simple return attribution model is used to parse market returns over various time frames.
Did you know that from the US equity market low at the end of February 2009 to December 31, 2013, the S&P 500 (in US dollars) has generated a total return of 178.9% or 23.6% annuallized? While 2.3% annually has come from dividends, and 5.1% has come from nominal dividend growth, dividend revaluation has generated returns of 15.1% annualized, or 64% of the total, as yields have fallen from 3.8% to 1.9%.
2013 was very positive for the developed equity markets, and moderately positive for emerging equity markets. Table 1 summarizes results from a Canadian dollar-based perspective. The analogous information for US-dollar-based investors is shown below.
Several points stand out.
Here is the information from a US-dollar-based perspective.
The main additional point is that USD investors suffered from all three foreign currency exposures, as the USD was strong against most currencies.
The US market has recovered from its low of February 2009, while other markets have made substantial inroads on their losses. But what has driven this recovery? We first look at the situation from a Canadian dollar perspective.
While all equity markets were strong over this period, Canadian dollar-based investors suffered from the rising Canadian dollar, which lowered foreign returns by 2.6 % to 3.6% annually.
The US equity market has been the strongest performer. Over the 58 months from the beginning of March, 2009, it returned 178.9% or 23.6% annualized in local terms, far surpassing its 2007 high. While nominal dividend growth was 5.1%, close to longer-term levels, 64% of the recovery was due to the revaluation of dividends, which produced a return of 15.1% annualized. The ending dividend yield of 1.9% is close to levels at the end of the last century and the early 2000s, and remains very low relative to longer-term norms.
Other points of note:
Here is the information from a USD perspective.
The additional story here is that US investors benefited from foreign currency exposures over this period.
The decade beginning in 2000 turned out to be a difficult period for equity investors, and despite stronger returns since the crisis of 2008, returns from the beginning of 2000 remain relatively low. We begin with the Canadian point of view.
Two general points hold across markets.
The US and EAFE posted particularly low returns.
Other points of interest:
Here are the results from the perspectives of a US investor.
The main additional point is that US investors benefited with unhedged exposures to the Canadian and EAFE equity markets.
It is important to understand what has driven markets over the longer term. There are three examples here:
Table 4 shows returns for the 22 years beginning January 1991, the longest time span over which the emerging markets data seem to have been relatively stable.
Several points are worth noting.
Table 5 shows returns and attribution for the 33 years beginning January 1980, a time span that many people view as "long-term history".
Table 6 presents the attribution analysis for the US equity market using the Shiller data, combined with S&P 500 total returns since 1970.
Since US dividend yields were generally above 4% until 1980, the return due to dividend yield is the largest component of return at 4.41%. Nominal dividend growth of 3.49% is lower than that of the past 30 years or so, and reflects the fact that inflation over this whole 142-year span was low, close to 2%. Returns due to revaluation are largely a function of falling dividend yields that has occurred since the early 1980s (see Table 5).
(1) Here are Tables 4 and 5 from a USD perspective.
(2) The idea that this level of return is "normal" (or to be expected), is probably derived from the longer-term experience of US investors in their home market. I discuss this and related issues at some length in How do you get THERE from HERE? (Return to text)
Structured Capital presents a book by Tim Appelt:
Historical analysis of long-term global equity and bond returns is used to develop an analytical framework for a historical attribution of returns. In turn this attribution approach is used to develop expectations of future returns that acknowledge the past but take into account current market conditions.