What If the Stock Market Were a Bond?

Here’s an update to one of my more off-the-wall ideas. I was curious to see what the historical performance of the stock market looks like, but in the form of a bond.

Crazy? Let me explain.

I took all of the historical market performance of the Wilshire 5000 (including dividends) and invented a hypothetical long-term bond that matched the market’s daily gains step-for-step.

I assumed that it’s a bond of infinite maturity and pays a fixed coupon.

There’s one hitch, though. I have to choose a starting yield-to-maturity for the beginning of the data series in December 1970. So this isn’t a completely kosher experiment because the starting point is based on my guess.

If I choose a number that’s too high, the historical performance wouldn’t be able to keep up, and the yield-to-maturity would grow higher and higher and soon leave orbit. Conversely, if my starting YTM is too low, the yield would gradually get pushed down to microscopic levels.

Fortunately, the data makes my job easy. After five decades, the window I have to work with is pretty narrow. Starting with 10% is too high, and 8% is too low. After playing with the numbers, I finally settled on 8.85%.

Even though this “bond” is completely make-believe, it reflects what the actual stock market really did for the past 50 years. It’s the same old stock market but it’s expressed in the form of a bond. Through Friday, the “bond’s” yield stood at 1.81%.

Here’s what the actual stock market looks like, expressed in the form of a bond. For comparison, I added Moody’s AAA Bond Index (in red). That series starts in 1983.

Here’s the same chart but just the last eight years.

It’s been nearly one year since the black line was higher than the red. When bonds have yielded more than stocks (red higher than black), the stock market has returned an average annual gain of 2.3%. But when stocks yield more than bonds (black higher than red), the stock market has returned an average annual gain of 29.6%.

Posted by on October 11th, 2021 at 2:45 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.