Any Happy Returns

Chapter 41949–1968: Post‐World War II Boom

A new optimism – filled with the promise of the future – prevailed.

—The Metropolitan Museum of Art

The post‐World War II (WWII) period was dominated by a powerful economic boom and is often referred to as the Golden Age of Capitalism. It was supported by the United States' initiative to aid Europe economically through the Marshall Plan (or the European Recovery Programme), which helped to boost growth and reduce unemployment. Productivity growth was strong, particularly in Europe and East Asia, and the post‐WWII ‘baby boom’ further strengthened demand.

While the economic environment was conducive to strong returns in equity markets in this period, valuations also recovered from their post‐WWII levels, aided by a secular decline in the equity risk premium as many of the risks to the global system faded.

Like most structural bull markets, this period reflected a combination of robust growth and low inflation. It also began with low valuations; as new international institutions and a rules‐based global trading system emerged, the price/earnings ratio (P/E multiple) of the S&P recovered from 9× in 1949 to 22× in 1968.

Over the super cycle, S&P returns in real terms including dividends reached roughly 1,100%, or 14% at an annualised rate (Exhibit 4.1).

Exhibit 4.1 Over the super cycle, S&P returns in real terms including dividends reached ...