Edward Renshaw
Professor of Economics
State University of New York at Albany
The answer to this question is: The first priority should be to obtain a good education. At the same time a student should strive to develop a portfolio of educational accomplishments that might be of value in effecting entry into a good graduate or professional school and in landing a rewarding job.
Once a student has entered the work-day-world and has accumulated some savings, he or she should begin to invest in common stock and not overlook the advantages to be obtained by sheltering some of the dividends and capital gains from taxation by keeping the certificates in a personally managed IRA.
Representative stock market averages have outperformed bonds and other types of assets over long periods of time. And if a young person were to begin to invest in stocks at the top of a bull market that might turn out to be a blessing in disguise by providing him or her with an opportunity to acquire additional shares at a bargain price during the ensuing bear market.
In 1863, German economist Heinrich von Thunen noted that a moral timidity seems to keep authors and everybody else from thinking about what a man costs and the amount of capital that is invested in him. The human being is considered so superior to other animals and inanimate objects that it would seem a disgrace to involve him in considerations of this kind.
Adam Smith, however, was not adverse to drawing an analogy between machines and human capital: "When any expensive machine is erected, the extraordinary work to be performed by it before it is worn out, it must be expected, will replace the capital laid out upon it, with at least the ordinary profits. A man educated at the expense of much labor and time to any of those employments which require extraordinary dexterity and skill, may be compared to one of those expensive machines. The work which he learns to perform, it must be expected, over and above the usual wages of common labor, will replace to him the whole expense of his education, with at least the ordinary profits of an equally valuable capital. It must do this too, in a reasonable time, regard being had to the very uncertain duration of human life, in the same manner as to the more certain duration of the machine."
Until about the mid-1950s economists still tended to neglect the study of human wealth. T. W. Schultz, then chairman of the Department of Economics at the University of Chicago, suggested that:
"the answer is that we cannot easily rise above our values and beliefs; we are strongly inhibited from looking upon men as an investment, except in slavery, and this we abhor. . .Our political and legal institutions have been shaped to keep men free from bondage. . .Thus it is understandable why a study of man, treating him as if he were wealth, runs counter to deeply held values, for it would seem to reduce him once again to a material component, to something akin to property, and that would be wrong."
Such economists as Kuznets, Abramovitz, Kendrick, and Solow, however, have shown that a large part of the secular increase in measured national income, perhaps as much as 50 percent, cannot be accounted for by increases in such conventional factors of production as land, manhours of work input, and investment in commercial facilities and industrial plant and equipment. This "mystery" and the encouragement of Professor Schultz, who was eventually awarded a Nobel Prize, has made it quite fashionable for younger economists to study the financial returns that have been associated with different amounts and types of education. Their main conclusion or "bottom line" has been that education often pays.
There is a risk that you might become interested in psychology, journalism, philosophy, history, labor or development economics and end up in a low paying job with compensation that is highly dependent upon "personal satisfaction". If you take your studies seriously, don't shirk the hard stuff, and are wise enough to acquire some marketable skills, however, there is a good chance that your college education will turn out to be the best investment you ever made.
Statistics compiled by the Census Bureau indicate that in 1990 men and women aged 25-34 with four years of college had mean earnings that were more than $10,000 greater than the mean earnings of persons 25-34 with only four years of high school. The salary offers to bachelor degree candidates compiled by the National Association of Colleges and Employers would suggest, however, that engineering, math and science are rewarded more heavily in the market place than other curriculums (Table 3.1S). Economics, in the eyes of this association, is now synonymous with "finance".
It should be noted, though, that many of the best jobs require more than a Bachelors degree and that the competition for good jobs is increasing. In 1947 only 5.4 percent of the adult population aged 25 and over had completed four years of college. By 1991 27.5 percent of those persons aged 35-44 had completed four years of college and 50.2 percent of this aged group had completed one or more years of college.
Word processing programs, computerized accounting systems and other types of sophisticated computer software are "dumbing" down many jobs that once required a great deal of skill and knowledge, if not a college education. Professors at most universities are now required to type their own manuscripts and secretaries have become an "endangered specie" in many government agencies. The Bureau of Labor Statistics has estimated that more than 30 percent of new college graduates in the 1990s will end up unemployment or in jobs that don't require a college degree. In such an environment it makes sense for students to research career opportunities at an early age and strive to acquire some marketable skills.
In an effort to spare students enrolled in my economic principles course A Future of Lousy Jobs? (Burtless, The Brookings Institution, 1990) I require them to visit our career development center (which welcomes visitors), pick a major of their own choosing and then in a two or three page statement contrast and compare the information presented in College, Knowledge, and Jobs published by the NYS Department of Labor with the information in the Occupational Outlook Handbook published by the US Department of Labor.
In my course in financial economics I require students to write a short review of a book that might be of interest to their parents, and other investors, with the hope that some of these reviews might turn out to be suitable for publication in a local newspaper.
I also require my students to browse through The Value Line Investment Survey, study information in 10-K and other company reports that are filed with the Security and Exchange Commission and are available in our university library on CD-ROM disks under the acronym "Disclosure" and write a short report on at least one company that they believe has a good chance of outperforming the stock market as a whole in the remainder of this century.
Before getting down to picking a "winner" I like to encourage my students to utilize information published in Standard and Poor's Security Price Index Record to see how their preferred industry has fared over long periods of time in comparison to the S&P composite stock price index. See Table 3.2S for a quick overview of how money center banks have fared since World War I. Persons familiar with monetary history can provide one with some interesting stories that might be of value in helping to explain differences in relative performance in this industry over time. A college educated investor should strive, over time, to become something of an authority on at least one industry.
Every student enrolled in my course is expected to up-date one or two tables from The Practical Forecasters' Almanac and use financial information in our library to evaluate a publicized "market timing" or "equity picking" strategy for beating the stock or bond market in at least one out-of-sample period.
My students are also encouraged to begin the task of becoming an authority on an important topic in financial economics (of their own choosing) by summarizing some of the conclusions or points that have been made in newspapers, professional journals, government publications and various and sundry text books about such subjects as J curves, financial derivatives, rational expectations, Ricardian equivalence and the possibility of "twin deficits".
The goal of an introductory course in financial economics, I believe, should be to develop some of the analytical and data familiarity skills that might enable students to do a better job of managing their own portfolio and perhaps go on and become a professional economist or Wall Street analyst. In doing so I like to give students as much freedom as possible, in the hope that some of them will become addicted to studying the financial markets and using data to test hypotheses of their own choosing.
It is not true in the short run and there is no reason why it should necessarily be the case that stocks will outperform bonds in the long run (see Essay 5S). Every reputable study since the publication of Common Stocks as Long-Term Investments, by Edgar L. Smith in (1925), however, has been forced to conclude that the financial returns associated with representative stock price indexes--such as the DJIA and the S&P 500--have outperformed bonds and other types of financial assets over long periods of time. See Jeremy Siegel's (1994) book for a more recent analysis and up-date of the numbers and literature in this area.
The data in columns (4) and (5) of Table 3.3S allow one to compare the annual financial returns from common stock and long term government bonds over the fairly long period from 1926-94. Some of the most spectacular years to have owned common stock (1933, 1954, 1976, 1982 and 1995) have occurred after years when the average yield on Moody's Aaa bonds in column (1) has increased and the CPI inflation rate in column (2) has declined. There is no assurance, however, that the financial returns from holding common stock in such a favorable environment for equities will always be positive or that stocks will always outperform government bonds. In the 1990s the financial returns associated with the S&P composite stock price index have (so far) only outperformed the price appreciation associated with 20 year coupons stripped from US government bonds about half of the time.
While it is not easy to predict the direction of long term interest rates on a year-to-year basis, history suggests that investors would have been better off, on the average, to have invested in long term bonds after the real inflation adjusted yield on Moody's Aaa corporate bond index was equal to three percentage points or more than to have invested in bonds after the real interest rate was less than three percent. From 1926-60 the mean return advantage for US government bonds was about 1.8 percentage points, when the preceding real interest rate was 3.0 percent or more, and in the more recent period from 1961-90 the advantage was about 8.5 percentage points. Ten of the 14 years of double digit returns for long term government bonds from 1926-93 followed real interest rates in excess of 3.0 percent.
Persons who invested in long term bonds in response to a real interest rate of 4.2 at the end of 1993, however, would have been badly burned by the Fed's preemptive strike against the possibility of accelerating inflation. While academics have been very slow to integrate notions and data about the Fed's interest rate reaction function into course material I believe that students who are hoping to make a fortune on Wall Street are well advised to take at least one advanced course in macro economics with a focus on money and banking.
Martin Zweig, whose stock market newsletter outperformed 24 other newsletters during the 1980s, has developed a complicated set of economic and financial indicators to predict what will happen in the stock market. In his book, Winning on Wall Street, Zweig's main advice to investors is, "Don't Fight the Fed."
That advice is even more applicable to investors in fixed income securities. There were only three years from 1949-94 when the Fed allowed the yield on new issues of three month Treasury bills to increase on a December-to-December basis and the financial return on long term government bonds exceeded the return on Treasury bills. See Table 3.4S.
The first case occurred during 1962--a stock market crash in the midst of prosperity year when inflation was not a serious problem and some investors may have been scared out of equities and into long term bonds. The second exception occurred during 1972 after President Nixon did what he promised not to do and imposed a system of wage and price controls on a peace time economy. The year-to-year inflation rate in 1972 actually declined in an impressive manner from 4.4 percent in 1973 to only 3.2 percent.
While 1995 might turn out to be another exception, the only other recent exception occurred during 1988. Long term rates had surged upward during 1987, in response to rebounding oil prices, and that may have enabled the Fed to catch up, so to speak, with bond market expectations and raise short term rates 2.3 percentage points without touching off another bond market crash.
Since 1949 the Fed has almost always allowed the T-bill yield to increase during any year when the acceleration in the CPI inflation rate amounted to .3 percentage points or more on a December-December basis (Renshaw 1992, Table 1.89). The only exceptions, so far, are 1974 and 1990 when the US economy plunged into worrisome recessions.
In thinking about what might happen to short term interest rates in the years ahead one is well advised to remember that the Fed's interest rate reaction function has become more foreword looking in recent years. In the future the Fed may not be as inclined to wait until numerous indicators are pointing in the direction of accelerating inflation before raising short term interest rates.
In his now classic article titled, "Can Stock Market Forecasters Forecast?" Alfred Cowles (1933) concluded: "It is doubtful." Another long term follower of efforts to predict what might happen in the stock market, Nobel Laureate Paul Samuelson, has voiced similar skepticism.
In his (1989) review of efforts to refute the random walk hypothesis Samuelson concluded: "Broadly speaking, the case for efficient markets is a bit stronger in 1989 than it was in 1974, or in 1953 when Holbrook Working and Maurice Kendall were hypothesizing that stock and commodity price changes are pretty much a random walk (or a white-noise martingale). Out of the thousands of published and unpublished statistical testings of various forms of the hypothesis, a few dozen representing a minuscule percentage have isolated profitable exceptions to the theory."
This perception of the stock market, however, is in the process of changing. Fortune (1991) has summarized a number of studies which have cast considerable doubt on the random walk hypothesis. The presumption that the stock market behaves in the manner of a random walk, moreover, is not very credible when one considers its behavior in relation to the business cycle (Table 1.1S) and its response to increases in the real money supply (Renshaw 1992, Table 1.77).
The Federal Reserve has a tendency to lean against the wind and presumably wouldn't let short term interest rates decline or increase at a moderate pace if it believed that the inflation rate was likely to accelerate at a rapid rate. From 1948-92 there were 24 years when the December-to-December percentage change in the average monthly yield on new issues of three month Treasury bills was negative or less than ten percent. Only two of these years (1976 and 1989) have so far been followed by negative returns for the S&P index. In both of these cases the inflation rate for the Consumer Price index accelerated by at least 1.5 percentage points (on a December-December basis) in the following year. See Table 3.5S.
The data in Table 3.6S are based on fluctuations of 20 percent or more in the average monthly discount rate on new issues of 91 day Treasury bills. Buying the S&P index after a downside reversal of this magnitude and holding it for one year would have always enabled a no load investor to at least break even one year later and in most cases benefit from a double digit return. For the nine declines of 20 percent or more which occurred in the midst of a recession the average following year price appreciation for the S&P index is 28.6 percent.
If a diversified portfolio of common stock continues to provide investors with a compound average return of nine percent per year, as has been the case on the average since about the end of the Civil War in the US, a young person who invests $2,000 per year in an IRA from the age of 20 to the normal age of retirement at age 65 can reasonably expect to become a millionaire. Enhancing the average return from say 9 to 11 percent, through superior management, would shorten the time required to achieve this objective from 45 to only 39 years. See Table 3.7S.
Cowles, Alfred (1933). "Can Stock Market Forecasters Forecast?" Econometrica, (July) 309-24.
Fortune, Peter (1991). "Stock Market Efficiency: An Autopsy?" New England Economic Review, March/April, 17-40.
Renshaw, Edward (1992). The Practical Forecasters' Almanac(Burr Ridge, Illinois: Irwin Professional Publishing).
Samuelson, Paul (1989). "The Judgment of Economic Science on Rational Portfolio Management: Indexing, Timing, and Long Horizon Effects," The Journal of Portfolio Management, (Fall), 4-12.
Siegel, Jeremy (1994). Stocks for the Long Run(Burr Ridge, Illinois: Irwin). Required reading for students enrolled in my Financial Economics course, Fall 1995.
Gianturco, Michael (1995). The Market that Beats the Market: How to Profit in Technology Stocks and Funds(Boston: Little Brown). You might be well advised to read this book before investing in a biotech company.
Hagstrom, Robert (1994). The Warren Buffet Way(New York: Wiley & Sons). Can his approach benefit ordinary investors?
Maturi, Richard (1995). The 105 Best Investments for the 21st Century(New York: McGraw-Hill). Students might be encouraged to choose one or more of the industries covered in this book and see how his picks have performed relative to the most pertinent component of the S&P 500 stock price index.
Seiver, Daniel (1994). OutSmarting Wall Street(Chicago: Probus). Outlines a method of beating the market using information published in the Value Line Investment Survey that could use further testing.
Slattler, John (1995). Straight Talk About Stock Investing(New York: McGraw-Hill). Contains some interesting stock selection approaches that might be worthy of further testing.
Spiering, Scott (1995). The Frugal Investor: How to Build a Low-Risk Portfolio(New York: American Management Association). Some good advice on how to minimize transaction costs.
Staton, Bill (1995). The America's Finest Companies Investment Plan(New York: Hyperion). Outlines an interesting strategy for trying to outperform the market that seems worthy of further research.
Chemical Engineering $40,268 Electrical Engineering 36,230 Mechanical Engineering 35,956 Computer Science 33,813 Nursing 32,227 Mathematics 31,773 Management Information Systems----30,910 Civil Engineering 30,707 Chemistry 30.115 Economics and Finance-------------28,016 Accounting------------------------27,948 Marketing 25,450 Political Science/Government 25,156 Foreign Languages 24,026 Special Education 23,272 Elementary Education 22,625 Criminal Justice 22,515 Biological Science 22,470 Sociology 22,403 Psychology 21,379 Journalism 19,705
Source: National Association of Colleges and Employers, "Salary $urvey", July 1995.
Year October Index Values Percentage Changes
-------------------- ------------------
Money S&P Money S&P
Center Composite Center Composite
Banks Index Banks Index
1918 8.48 7.86 ---- ----
1929 72.86 27.99 759.2 256.1
1933 9.53 9.55 -86.9 -65.9
1936 15.24 16.89 59.9 76.9
1942 9.23 9.32 -39.4 -44.8
1955 19.20 42.11 108.0 351.8
1973 73.43 109.84 282.4 160.8
1974 44.15 69.44 -39.9 -36.8
1987 102.1 280.16 131.3 303.5
1989 130.5 347.40 27.8 24.0
1994 156.31 463.81 19.8 33.5
1995e 201.96 557.37 29.2 20.2
e represents an estimate based on values for July, 1995.
Source of basic data: Standard and Poor's Security Price Index Record.
Following Year Financial Returns
Yield CPI Real ---------------------------------------
Year Moody's Inflation Interest Common Government Five-Year Treasury
Bonds Rate Rate Stock Bonds Gov. Bonds Bills
(1) (2) (3)n (4) (5) (6) (7)
1925 4.9 2.6 2.3 11.6$ 7.8 5.4 3.3
1926P 4.7 .8 3.9* 37.5$ 8.9* 4.5 3.1
1927T 4.6 -1.9 6.5* 43.6$ .1* .9 3.2**
1928 4.6 -1.2 5.8* -8.4 3.4* 6.0# 4.8**
1929P 4.8 .0 4.8* -24.9 4.7* 6.7# 2.4
1930 4.6 -2.6 7.2* -43.3 -5.3* -2.3 1.1**
1931 4.6 -9.0 13.6* -8.2 16.8*B 8.8 1.0
1932 5.0+- -10.2 15.2* 54.0$ - .1* 1.8# .3**
1933T 4.5 -5.3 9.8* -1.4 10.0* 9.0 .2
1934 4.0 3.4 .6 47.7$ 5.0 7.0# .2
1935 3.6 2.6 1.0 33.9$ 7.5 3.1 .2
1936 3.2 1.0 2.2 -35.0 .2 1.6# .3**
1937P 3.3 3.5 - .2 31.1$ 5.5 6.2# .0
1938T 3.2 -1.8 5.0* - .4 5.9* 4.5 .0
1939 3.0 -1.4 4.4* -9.8 6.1* 3.0 .0
1940 2.8 .7 2.1 -11.6 .9 .5 .1
1941 2.8 5.0 -2.2 20.3$ 3.2 1.9 .3
1942 2.8 10.9 -8.1 25.9$ 2.1 2.8# .3
1943 2.7 6.1 -3.4 19.8$ 2.8 1.8 .3
1944 2.7 1.7 1.0 36.4$ 10.7B 2.2 .3
1945PT 2.6 2.3 .3 -8.1 - .1 1.0# .4**
1946 2.5 8.3 -5.8 5.7$ -2.6 .9# .5**
1947 2.6 14.4 -11.8 5.5$ 3.4 1.8 .8
1948P 2.8+- 8.1 -5.3 18.8$ 6.4 2.3 1.1
1949T 2.7 -1.2 3.9* 31.7$ .1* .7 1.2**
1950 2.6 1.3 1.3 24.0$ -3.9 .4 1.5**
1951 2.9 7.9 -5.0 18.4$ 1.2 1.6 1.7**
1952 3.0+- 1.9 1.1 -1.0 3.6 3.2 1.8
1953P 3.2+- .8 2.4 52.6$ 7.2 2.7 .9
1954T 2.9 .7 2.2 31.6$ -1.3 - .6 1.6**
1955 3.1+- - .4 3.5* 6.6$ -5.6* - .4 2.5**
1956 3.4 1.5 1.9 -10.8 7.5 7.8# 3.1
1957P 3.9 3.3 .6 43.4$ -6.1 -1.3 1.5**
1958T 3.8 2.8 1.0 12.0$ -2.3 - .4 3.0**
1959 4.4+- .7 3.7* .5 13.8*B 11.8 2.7
Following Year Financial Returns
Yield CPI Real ---------------------------------------
Year Moody's Inflation Interest Common Government Five-Year Treasury
Bonds Rate Rate Stock Bonds Gov. Bonds Bills
(1) (2) (3)n (4) (5) (6) (7)
1960P 4.4 1.7 2.7 26.9$ 1.0 1.8 2.1**
1961T 4.4 1.0 3.4* -8.7 6.9* 5.6 2.7
1962 4.3 1.0 3.3* 22.8$ 1.2* 1.6 3.1**
1963 4.3 1.3 3.0* 16.5$ 3.5* 4.0# 3.5
1964 4.4 1.3 3.1* 12.4$ .7* 1.0 3.9**
1965 4.5 1.6 2.9 -10.1 3.6 4.7 4.8**
1966 5.1 2.9 2.2 24.0$ -9.2 1.0 4.2**
1967 5.5 3.1 2.4 11.1$ - .3 4.5 5.2**
1968 6.2 4.2 2.0 -8.5 -5.1 - .7 6.6**
1969P 7.0 5.5 1.5 4.0 12.1 16.9# 6.5
1970T 8.0 5.7 2.3 14.3$ 13.2 8.7 4.4
1971 7.4 4.4 3.0* 19.0$ 5.7* 5.2 3.8
1972 7.2 3.2 4.0* -14.7 -1.1* 4.6 6.9**
1973P 7.4 6.2 1.2 -26.5 4.4 5.7 8.0**
1974 8.6 11.0 -2.4 37.2$ 9.2 7.8 5.8
1975T 8.8+- 9.1 - .3 23.8$ 16.8B 12.9 5.1
1976 8.4 5.8 2.6 -7.2 - .7 1.4 5.1**
1977 8.0 6.5 1.5 6.6$ -1.2 3.5 7.2**
1978 8.7 7.6 1.1 18.4$ -1.2 4.1 10.4**
1979 9.6 11.3 -1.7 32.4$ -4.0 3.9 11.2**
1980PT11.9 13.5 -1.6 -4.9 1.9 9.4 14.7**
1981P 14.2+- 10.3 3.9* 21.4 40.4*B 29.1 10.5
1982T 13.8 6.2 7.6* 22.5$ .7* 7.4 8.8**
1983 12.0 3.2 8.8* 6.3 15.4* 14.0 9.8
1984 12.7 4.3 8.4* 32.2$ 31.0*B 20.3 7.7
1985 11.4 3.6 7.8* 18.5 24.4*B 15.1 6.2
1986 9.0 1.9 7.1* 5.2$ -2.7* 2.9 5.5**
1987 9.4 3.6 5.8* 16.3$ 8.8* 6.0 6.4
1988 9.7 4.1 5.6* 31.2$ 18.1*B 13.7 8.4
1989 9.3 4.8 4.5* -3.1 -1.4* 9.0# 8.3**
1990P 9.3 5.4 3.9* 30.0$ 20.9*B 16.8 7.6
1991T 8.8 4.2 4.6* 7.4 8.1* 7.7 4.4
1992 8.1 3.0 5.1* 9.4 28.5*B 11.2 4.0
1993 7.2 3.0 4.2* 1.3$ -13.8 -4.7 3.6
1994 8.0+- 2.6 5.4* ? ? ? ?
(3)n. Column (1) minus column (2).
B identifies cases where the following financial return for government bonds was ten or more percentage points greater than the return on Treasury bills in column (7). After "bubbles" of this magnitude government bonds have usually performed less well than Treasury bills. This was not the case after the 31.0 percent return during 1985 and the 8.1 percent return for 1992.
P identifies years containing an official NBER peak in business activity.
T identifies years containing an official NBER trough in business activity.
* identifies years when the real interest rate in column (3) was equal to 3.0 percentage points or more. The financial returns from holding long term bonds have tended to be higher after real interest rates in excess of 3.0 percent.
**identifies years when the return on T-bills in column (6) was greater than the return on government bonds in column (5).
$ Identifies years when common stock outperformed long term government bonds.
# Identifies years when the return on five-year government bonds was greater than the return on both long term government bonds and Treasury bills.
+-identifies years when the yield on Moody's Aaa bonds in column (1) increased and the CPI inflation rate in column (2) declined. Except for 1932 and 1955 the following year return on government bonds has been greater than the return on Treasury bills.
Sources: The financial returns from 1926-87 are from Roger Ibbotson and Rex Sinquefield, Stocks, Bonds, Bills, and Inflation(Charlottesville, Virginia: The Research Foundation of the Institute of Chartered Financial Analysts, 1989). Since 1989 the financial returns for common stock are for the S&P 500 stock price index. For government securities the financial returns are obtained by computing the price appreciation associated with end of the year asked and bid prices for stripped coupons maturing in February which are reported in the Wall Street Journal. For the government securities in columns (5), (6) and (7) the coupons have initial maturities that are slightly in excess of 20 years, five years and one year, respectively. While these returns are not strictly comparable to the returns compiled by Ibbotson and Sinquefield, they have the advantage of being defined in an unambiguous manner that is easier to up-date.
Year Change in CPI Current Year Financial Returns
T-Bill Inflation Government Treasury
Yield Rate Bonds Bills
1980 3.6 12.5 -4.0 11.2**
1978 3.0 9.0 -1.2 7.2**
1979 3.0 13.3 -1.2 10.4**
1994---------2.6-----------2.7---------- -13.8--------- 3.6**
1973 2.3 8.7 -1.1 6.9**
1988 2.3 4.4 8.8 6.4
1959 1.8 1.7 -2.3 3.0**
1969 1.8 6.2 -5.1 6.6**
1977 1.7 6.7 - .7 5.1**
1955 1.4 .4 -1.3 1.6**
1972 1.1 3.4 5.7 3.8
1983 1.0 3.8 .7 8.8**
1968 .9 4.7 - .3 5.2**
1956 .6 3.0 -5.6 2.5**
1963 .6 1.6 1.2 3.1**
1966 .6 3.5 3.6 4.8**
1965 .5 1.9 .7 3.9**
1952 .4 .8 1.2 1.7**
1964 .4 1.0 3.5 3.5
1950 .3 5.9 .1 1.2**
1951 .3 6.0 -3.9 1.5**
1961 .3 .7 1.0 2.1**
1962 .3 1.3 6.9 2.7
1987 .3 4.4 -2.7 5.5**
1967 .0 3.0 -9.2 4.2**
**Identifies years when the return on T-bills was greater than the return on government bonds.
Source of financial returns: Table 3.3S.
December-December Following Year
Percentage Change Financial Return
Average Yield New S&P Stock Index
Year 3-Month T-Bills (Percent)
(1) (3)
1948 21.1 17.8
1949 - 4.3 30.5*
1950 24.5 23.4
1951 26.3 17.7
1952 23.1 - 1.2
1953 -23.5 51.2**
1954 -28.2 31.0**
1955 118.8 6.4
1956 26.2 -10.4
1957 - 4.0 42.4*
1958 - 9.4 11.8*
1959 62.6 .3
1960 -50.3 26.6**
1961 15.4 - 8.8
1962 9.2 22.5*
1963 23.1 16.3
1964 9.7 12.3*
1965 13.0 -10.0
1966 14.9 23.7
1967 .0 10.8*
1968 18.2 - 8.3
1969 30.4 3.5
1970 -37.0 14.1**
1971 -17.3 18.7**
1972 25.9 -14.5
1973 45.5 -26.0
1974 - 2.4 36.9*
1975 -23.4 23.6**
1976 -20.9 - 7.2**
1977 39.3 6.4
1978 50.5 18.4
1979 32.3 31.5
December-December Following Year
Percentage Change Financial Return
Average Yield New S&P Stock Index
Year 3-Month T-Bills (Percent)
(1) (3)
1980 29.7 - 4.8
1981 -30.2 20.4**
1982 -26.7 22.3**
1983 11.9 6.0
1984 - 8.9 31.1*
1985 -13.4 18.5**
1986 -22.3 5.7**
1987 6.0 16.3*
1988 39.5 31.2
1989 - 5.6 - 3.1*
1990 -10.9 30.0**
1991 -39.5 7.4**
1992 -21.1 9.9**
1993 - 5.2 1.3*
1994 83.1 ?
*Financial return following a decline in the T-bill rate of not more than ten percent or an increase in the T-bill rate of less than ten percent.
**Financial return following a decline in the T-bill rate of more than ten percent.
Source of basic data: BCI series 114 and Standard and Poor's Security Price Index Record
Purchase T-Bill Value % Change S&P Index
Date Rate S&P Following
(percent) Index Year
10/30/53 1.40 24.54 29.1*
1/31/58 2.60 41.70 32.9*
3/31/60 3.44 55.34 17.6*
3/31/67 4.29 90.20 .0
9/30/70 6.27 84.21 16.6*
11/30/71 4.19 93.99 24.1
1/31/75 6.49 76.98 31.0*
1/30/76 4.96 100.86 1.2
5/30/80 9.15 111.24 19.2*
11/30/81 11.27 126.35 9.6*
8/31/82 9.01 119.51 37.6*
12/31/84 8.16 167.24 26.0
12/31/90 6.81 330.22 26.3*
Average Gain 20.9
*Gains associated with recessionary declines in the T-bill rate.
Source of basic data: BCI series 114 and Standard and Poor's Security Price Index Record.
Average
Interest Time
Rate in Required
Percent In Years
0 500
3 94
8 49
9 45
10 42
11 39
12 37
13 35
14 33
15 31
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