What if the lesson of history is that the future will be unlike the past? In that event, of course, all bets are off.
In an interview, Taylor said he expects a coming era of persistently low interest rates.
While an era of rising interest rates is possible, as was the case from 1945 to 1981, that also seems unlikely in light of the Federal Reserve’s stated intentions.
He said that his best guess is that the equity premium going forward will be small — around 3%.
An equity premium of 3% therefore translates to an expected stock market return of just 4.64% annualized before inflation, and 2.22% annualized after inflation.
We can torture the data to project a higher equity premium if we extend our analysis back to World War II, or a much lower premium if extend it even further back to 1792.
This perspective challenges us to approach financial market history in an entirely new way.