Charts showing massive divergence are interesting to look at most of the time. And the ‘gap’ chart between US equity and bond returns is no exception. Since the start of 2013, US stocks have realized an average annual return of 14.4% against an average annual return on US Treasuries of just 1.4%. This suggests that while the Federal Reserve has been actively buying up government bonds between 2013 and 2018, at least some of that excess liquidity has found its way into the stock market as well. As a result, the realized risk premium on equities has been more than twice the long-term historical average.

So, what about Europe? Here the gap between equities and bonds is far less outspoken. Since 2013, Eurozone stocks have generated an average annual return of 7.4%, roughly in line with the long-term average, whereas Eurozone government bonds realized an average annual return of 3.7%.

What explains this smaller gap between Eurozone equity and bond returns? First, the ECB’s Quantitative Easing program is much bigger (both in terms of balance sheet and GDP) than that of the Federal Reserve, pushing bond yields lower. Second, Eurozone stock markets have lagged for several reasons. For instance, the recovery in earnings per share has been much stronger in the US than in the Eurozone. In addition, Eurozone stocks are impacted by an ongoing series of political issues with material economic impact, of which the (aftermath of the) sovereign debt crisis and Brexit are just two examples. This has translated into a higher required risk premium, hence a lower realized risk premium.