Stocks and Bonds: Comparing the Range of Potential Outcomes

Investors fleeing stocks have mostly sought shelter in bonds. That’s understandable, given their relative stability and reliable income. But it’s important to compare long-term expected returns, too.

While bonds can be volatile in the short term, over longer time horizons, expected returns for bonds are easy to project: they are close to the starting yield, and the range of possible outcomes is narrow. Today, yields are extraordinarily low.

In July, the yield on the 10-year Treasury fell below 1.4%—the lowest level since the beginning of the Treasury market in 1790. Yields on five-year AAA municipal bonds (which taxable US investors are more likely to buy than Treasuries) are about 0.75%, close to their lowest point in the data history available since 1950.

Our Capital Markets Engine uses a far more nuanced model than the one we used in the earlier posts in this series. It projects 10,000 plausible outcomes for the markets based on initial conditions and proprietary econometric models.*

Given today’s very low bond yields, our Capital Markets Engine projects that $1 million invested in intermediate-duration municipal bonds today would be worth between $1.1 million and $1.4 million after 10 years, excluding the best and worst 1,000 scenarios, with a median return of $1.2 million, as the display below shows. That’s not likely to keep up with inflation, let alone support 3% spending per year.

The Projected Range of Outcomes for Bonds Is Both Narrow and Low

Our projected range of outcomes for stocks is, as always, much wider. Our Capital Markets Engine projects that $1 million invested in global stocks today would be worth between $1.0 million and $3.2 million after 10 years (excluding the best and worst 1,000 scenarios), as the display also shows.

But the lower end of our projected outcomes for stocks is about the same as the lower end of our projected outcomes for municipal bonds, even though stocks have much higher median projected value of $1.8 million—and even greater upside from there. Our median projected value reflects a current projected annualized median return of about 8%.

That’s somewhat below our normal level, principally because we expect profit margins to come down somewhat from current high levels.

Stocks normally have a 75% chance of beating bonds over a 10-year period. As a result of current unusual conditions, we project that today the odds of global and US stocks beating bonds over the next 10 years are 88%. So for long-term investors, the odds clearly favor maintaining a healthy exposure to stocks.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.


*Dokyoung Lee and Seth J. Masters, “Long-Horizon Investment Planning in Globally Integrated Capital Markets,” The Journal of Wealth Management (Spring 2012).

Seth Masters

Chief Investment Officer—Bernstein
Seth Masters is Chief Investment Officer of Bernstein. He heads the team that provides customized wealth-planning advice and manages the firm’s private client portfolios. Masters was previously CIO for Asset Allocation, overseeing the firm’s Dynamic Asset Allocation, Target Date, Target Risk and Indexed services. In June 2008, he was appointed head of AllianceBernstein’s newly formed Defined Contribution business unit, which has since become an industry leader in custom target-date and lifetime income portfolios. Masters became CIO of Blend Strategies in 2002 and launched a range of style-blended services. From 1994 to 2002, he was CIO of Emerging Markets Value Equities. He joined Bernstein in 1991 as a research analyst covering global financial firms. Masters has frequently been cited in print and appeared on television programs dealing with investment strategy. He has published numerous articles, including “The Case for the 20,000 Dow”; “Long-Horizon Investment Planning in Globally Integrated Capital Markets”; “Is There a Better Way to Rebalance?”; and “The Future of Defined Contribution Plans.” Masters worked as a senior associate at Booz, Allen & Hamilton from 1986 to 1990 and taught economics in China from 1983 to 1985. He holds an AB from Princeton University and an MPhil in economics from Oxford University. He is fluent in French and Mandarin Chinese. Location: New York

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