Which performed better in the past, Stocks or Bonds?
The ratio in the chart above divides the S&P 500 by a Total Return Bond Index.
When the ratio rises, stocks beat bonds - and when it falls, bonds beat stocks.
Stocks are a form of equity and Bonds are a form of debt. Equity and debt are the two different ways of financing a company. Stocks are riskier than bonds. They represent an ownership stake in a company and let you participate in its profits and losses. When the company goes bankrupt the shareholders get paid last. Whereas stocks pay dividends, bonds pay interest. In contrast to dividends, the interest payments on bonds are guaranteed. For this reason bonds are classified as "fixed income" instruments.
Due to its "fixed income" nature, a bond's value is primarily influenced by changes in inflation and interest rates. A stock's value on the other hand is susceptible to a variety of factors, including changes in earnings growth expectations.
This chart gives a different view of the data from the chart above, comparing the percentage change between
S&P 500 and the Total Return Bond Index over time.
The Bond Index was calculated combining 5 different sources. Unfortunately, with these different sources we are not always comparing apples to apples. Until 1826 the index consists of federal bonds, until 1850 it's mostly municipal bonds, and until 1897 it's an aggregate of federal, municipal and corporate bonds. Since 1897 all sources use investment grade corporate bonds.
This version of the S&P 500 is a price index in contrast to total return index. Therefore, it does not include dividends. Including dividends leads to a very different picture, which is demonstrated in the chart below.
The ratio in the chart above consists of total return indices for both stocks and bonds. Therefore, dividend payments from stocks are also taken into account. The methodology and the data sources for the Total Return Stock Index are described on this page.
Special thanks to Edward F. McQuarrie for generously providing data and advice that led to the creation of this page.
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