Why is stock market return so consistent over time?

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mffl
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Why is stock market return so consistent over time?

Post by mffl »

I've always wondered why stock market returns are so consistent over very long periods of time. According to http://www.moneychimp.com/features/market_cagr.htm, inflation and dividend adjusted returns are 7% since 1871. There are plenty of ups and downs, but the longer timespan you look at, the more likely it settles at 7% real, 10% nominal. That's whether you're looking at the late 1800s, mid 1900s, or early 2000s.

A couple time periods picked at random:
1871 to 1950: 6.61% real
1929 to 1960: 6.40% real
1960 to 2021: 6.61% real (I promise, I'm just picking these at random)

The real vs nominal gap is somewhat explainable in that the US government seems to actively promote 2% inflation and occasionally biffs it on the upside like 2021-22 and the late 70s to early 80s, so it's about 3% long term. But what on Earth is the mechanics behind 7% real over literally 150+ year periods? Obviously the shorter time period you select, the more likely you'll deviate from the norm. The longer you select at some point it just becomes a tautology (of course 1871 to 2021 is close to 7% because 1871 to 2021 is close to 7%). But 1871 to 1955 is 7.46% and 1955 to 2021 is 7.03%. Something is going on here. But what could it be? I suppose we could assume something about the innate power and also limitations of human capacity for productivity growth and population growth, but I'm really finding it difficult to see much in common between 1871-1955 and 1955-2021. I mean, we're starting with a time period before automobiles up until a time period where everyone carries around supercomputers in their pockets and doesn't have kids anymore. And whatever this mechanism is could care less how many world wars we have or whether there's any humans on the moon or not.

Is it a self fulfilling prophecy? Humanity expects 7% growth over the long term so it gets it? But does this phenomenon apply generally outside the US?

And then my entire adult life I've been told that the good times are over and we'll start seeing only 4% or 2% or even 0% real returns. Well, it may be prudent to plan for that, and these guys may end up being right at some point. But my adult life is 1998 to 2021, which is... 6.41%, despite including some really nasty surprises.

But I'm actually not looking for future prognostication here. I'm really just marvelling at the consistency of the market rate of return for nearly two centuries. Somewhat ironically, the time spans at which it gets really, really consistent are too long for human investors to count on. It still trends up, but if you want to have a rock solid shot at 7%, you'd better be prepared to work for 75 years.

Anybody have any idea what the mechanism is behind this? Or *was* we could say, without attempting to assume it will continue.

Maybe I'm just seeing patterns where there are none, but I'm far from the first to notice this pattern. I just haven't ever seen someone take a good stab at *why*. Maybe there's some good books or white papers on this that someone can point me to.
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Re: Why is stock market return so consistent over time?

Post by Apathizer »

I think you might be equating average with consistency. If the market returned 7% almost every year with very little variation that would be pretty remarkable and consistent. But 7% is an average and historically the returns have been all over the place. Some years have returned 30 plus percent others it's lost more than 20%.

I'm not sure why this would be considered remarkable. There are many investment vehicles attempting to maximize return. It just so happens that the global equity market produces the best returns of any passive investment. If bonds had better returns I suppose we could marvel at those instead.
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CletusCaddy
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Re: Why is stock market return so consistent over time?

Post by CletusCaddy »

The figure you should really be looking at for consistency is the equity risk premium, I’m going by memory here but I believe Damodaran has shown that is pretty consistent as well over multiple eras.

It probably has something to do with a “natural” level of profitability in the capitalist system.
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Lawrence of Suburbia
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Re: Why is stock market return so consistent over time?

Post by Lawrence of Suburbia »

I'd suggest demographics as part of it. As worldwide birthrates slow, I'm thinking stock returns will decrease.

I'm praying not, as I need some growth over the next decade so I can stop worrying as much.
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Apathizer
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Re: Why is stock market return so consistent over time?

Post by Apathizer »

Lawrence of Suburbia wrote: Thu Aug 11, 2022 12:36 am I'd suggest demographics as part of it. As worldwide birthrates slow, I'm thinking stock returns will decrease.

I'm praying not, as I need some growth over the next decade so I can stop worrying as much.
I think or at least I'm hopeful growth in developing countries will at least partially compensate for this. I guess we'll see, but many forecasts predict about 4% annual appreciation over the next decade or so rather than 7%.
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Valuethinker
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Re: Why is stock market return so consistent over time?

Post by Valuethinker »

mffl wrote: Wed Aug 10, 2022 11:57 pm I've always wondered why stock market returns are so consistent over very long periods of time. According to http://www.moneychimp.com/features/market_cagr.htm, inflation and dividend adjusted returns are 7% since 1871. There are plenty of ups and downs, but the longer timespan you look at, the more likely it settles at 7% real, 10% nominal. That's whether you're looking at the late 1800s, mid 1900s, or early 2000s.

A couple time periods picked at random:
1871 to 1950: 6.61% real
1929 to 1960: 6.40% real
1960 to 2021: 6.61% real (I promise, I'm just picking these at random)

The real vs nominal gap is somewhat explainable in that the US government seems to actively promote 2% inflation and occasionally biffs it on the upside like 2021-22 and the late 70s to early 80s, so it's about 3% long term. But what on Earth is the mechanics behind 7% real over literally 150+ year periods? Obviously the shorter time period you select, the more likely you'll deviate from the norm. The longer you select at some point it just becomes a tautology (of course 1871 to 2021 is close to 7% because 1871 to 2021 is close to 7%). But 1871 to 1955 is 7.46% and 1955 to 2021 is 7.03%. Something is going on here. But what could it be? I suppose we could assume something about the innate power and also limitations of human capacity for productivity growth and population growth, but I'm really finding it difficult to see much in common between 1871-1955 and 1955-2021. I mean, we're starting with a time period before automobiles up until a time period where everyone carries around supercomputers in their pockets and doesn't have kids anymore. And whatever this mechanism is could care less how many world wars we have or whether there's any humans on the moon or not.

Is it a self fulfilling prophecy? Humanity expects 7% growth over the long term so it gets it? But does this phenomenon apply generally outside the US?

And then my entire adult life I've been told that the good times are over and we'll start seeing only 4% or 2% or even 0% real returns. Well, it may be prudent to plan for that, and these guys may end up being right at some point. But my adult life is 1998 to 2021, which is... 6.41%, despite including some really nasty surprises.

But I'm actually not looking for future prognostication here. I'm really just marvelling at the consistency of the market rate of return for nearly two centuries. Somewhat ironically, the time spans at which it gets really, really consistent are too long for human investors to count on. It still trends up, but if you want to have a rock solid shot at 7%, you'd better be prepared to work for 75 years.

Anybody have any idea what the mechanism is behind this? Or *was* we could say, without attempting to assume it will continue.

Maybe I'm just seeing patterns where there are none, but I'm far from the first to notice this pattern. I just haven't ever seen someone take a good stab at *why*. Maybe there's some good books or white papers on this that someone can point me to.
1. the 20th Century was "the lucky century" especially for US markets. If we look at the world's largest stock markets in 1900 they included St Petersburg, Budapest, Vienna, Cairo, Buenos Aires. Many of these markets did spectacularly badly - dropping even to 0 - during the 20th Century.

Sydney, and New York, by contrast, did extremely well.

So there's survivor bias in the data. Triumph of the Optimists (Dimson, Marsh and Staunton) goes into the pattern of international returns in some detail.

2. Because of this, US stocks not only paid high dividends, but the other source of return, expansion of PE multiple, at least doubled over the course of the 20th century. That will be difficult (or impossible) to repeat.

3. Following on from the above, stocks pay high returns because of their fundamental volatility. Stock markets can, and do, drop 20% in a day. Drop 80% in real terms in 18 months (Britain in the mid 1970s) without war, revolution or other external disruption.

And they can drop 100%. Have done. Will do.

4. There's probably something about finite human lives here. As humans, we hold "too much" in safe assets - cash, low return bonds - because the volatility of stocks means that we can have consumption needs that happen during bear markets.

Also humans "are risk averse in the domain of losses". Hardwired by evolution. Lab tests suggest realising a loss is twice as painful as the pleasure of realising a gain. Thus we tend to be too conservative (and overly focused on book value).

One can say that in the long run, US stocks have returned 6% real. But there's no guarantee that over any given sub period (10, 20, 30 years etc) they will do that.
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Re: Why is stock market return so consistent over time?

Post by Valuethinker »

Apathizer wrote: Thu Aug 11, 2022 1:14 am
Lawrence of Suburbia wrote: Thu Aug 11, 2022 12:36 am I'd suggest demographics as part of it. As worldwide birthrates slow, I'm thinking stock returns will decrease.

I'm praying not, as I need some growth over the next decade so I can stop worrying as much.
I think or at least I'm hopeful growth in developing countries will at least partially compensate for this. I guess we'll see, but many forecasts predict about 4% annual appreciation over the next decade or so rather than 7%.
The world is going to run out of young people. Very fast. By 2050 I imagine the protection of children, eg from accidents with cars, will be something draconian. We are all going to look like Japan. Unfortunately Japan has a rather better record of looking after its old people (at least in terms of respect & place in society) than most of us do. Netherlands is also a good example (perhaps more duplicable) - they have special villages for dementia sufferers, for example.

The exception is, largely, sub Saharan Africa. There, the demographic dividend has not kicked in yet (rising ratio of workers to dependents eg Irish demographic transition of 1970s & 80s, or China). Nigeria is going to have a population of 400m on current trends.
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Re: Why is stock market return so consistent over time?

Post by dboeger1 »

Note that demographics are not the only factor in determining growth. A certain amount of growth is by design in modern economics. Central banks and governments effectively manipulate currencies and markets to achieve desired effects. The US in recent years has targeted a 2% stable inflation rate, and seems to be willing to go to great lengths to maintain it, even in the face of a global pandemic, global supply shocks, etc. I don't want to get too political as I've gotten on the wrong side of the forum mods for dancing around this topic before, but I'll just say that to some extent, it doesn't matter who the winners and losers are of these policies, as long as the overall system remains stable and functional. Overall growth doesn't necessarily mean more or better opportunity for any given individual, just that someone somewhere is making more money on average. Expecting economic growth to mirror demographic trends 1-for-1 is a bit too narrow, in my opinion.
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Re: Why is stock market return so consistent over time?

Post by makingmistakes »

Apathizer wrote: Thu Aug 11, 2022 12:14 am I think you might be equating average with consistency. If the market returned 7% almost every year with very little variation that would be pretty remarkable and consistent. But 7% is an average and historically the returns have been all over the place. Some years have returned 30 plus percent others it's lost more than 20%.

I'm not sure why this would be considered remarkable. There are many investment vehicles attempting to maximize return. It just so happens that the global equity market produces the best returns of any passive investment. If bonds had better returns I suppose we could marvel at those instead.
I thought he’s saying it’s the averages, when taken over multiple time spans, that are consistent.
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Re: Why is stock market return so consistent over time?

Post by phantom0308 »

mffl wrote: Wed Aug 10, 2022 11:57 pm the US government seems to actively promote 2% inflation and occasionally biffs it on the upside like 2021-22 and the late 70s to early 80s, so it's about 3% long term.
From 2000-2020 the US undershot this target so it’s not always overshooting, it’s just rare to get deflation that’d counteract a short period of inflation. You’d need 5 years of 1% inflation to counteract one year of 7% inflation.
The 2% target has only existed since the late 90s and was popularized by the central bank in New Zealand.
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Re: Why is stock market return so consistent over time?

Post by phantom0308 »

mffl wrote: Wed Aug 10, 2022 11:57 pm the US government seems to actively promote 2% inflation and occasionally biffs it on the upside like 2021-22 and the late 70s to early 80s, so it's about 3% long term.
From 2000-2020 the US undershot this target so it’s not always overshooting, it’s just rare to get deflation that’d counteract a short period of inflation. You’d need 5 years of 1% inflation to counteract one year of 7% inflation.
The 2% target has only existed since the late 90s and was popularized by the central bank in New Zealand.
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Re: Why is stock market return so consistent over time?

Post by bugleheadd »

Moving averages over long periods of time, as in your examples of 30+ years. Of course the chart line is going to appear flat.

Now do the same with 10 yr or less moving averages. The chart line will go up and down more dramatically
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Re: Why is stock market return so consistent over time?

Post by superjames1992 »

Apathizer wrote: Thu Aug 11, 2022 1:14 am
Lawrence of Suburbia wrote: Thu Aug 11, 2022 12:36 am I'd suggest demographics as part of it. As worldwide birthrates slow, I'm thinking stock returns will decrease.

I'm praying not, as I need some growth over the next decade so I can stop worrying as much.
I think or at least I'm hopeful growth in developing countries will at least partially compensate for this. I guess we'll see, but many forecasts predict about 4% annual appreciation over the next decade or so rather than 7%.
If I recall right, Vanguard put out a report in 2010 predicting low stock market returns for the 2010s. That didn’t turn out very well, to say the least. Don’t pay attention to future stock market predictions too much.
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Re: Why is stock market return so consistent over time?

Post by nisiprius »

I don't think it is. It's a disputed topic.

A claim of "stability" is associated with Jeremy Siegel and his book (five editions, starting in 1994), Stocks for the Long Run. It's related to a claim of "mean reversion," the observation that consecutive longish time periods are not independent, and there is some tendency for periods of higher return to be followed by periods of lower return, leading to more consistent return than if the market followed a truly random walk. For a while, his number--about 6.7% real--got the only-half-joking nickname, "Siegel's Constant."

If it is, then
  • the periods required for it to assure stability may be longer than the periods of time available to the average investor. (Even if you invest through age 20-65 continuously, due to career progress and varying expenses associated with the child-raising part of some lives, the contributions are apt to be effectively concentrated into a shorter time period).
  • the claimed "stability" is found in only a few national stock markets, not all of them.
  • the claimed "stability" may actually be a somewhat special feature of the US stock market for the approximate period 1926-present. As you go back farther in time, the data gets less reliable, and retired research Ed McQuarrie, who's been posting in this forum, wrote a paper in which he made use of historical data not available to Siegel, and found that the story for the 1800s is much less favorable than Siegel said.
Siegel spoke of
the extraordinary stability of the real return on stocks over all major subperiods:7.0 percent per year from 1802 through 1870, 6.6 percent from 1871 through 1925, and 6.8 percent a year since 1926. [i.e. until 2007]
Notice that he chose unequal subperiods, and I've looked for, and failed to find in his book, a clear explanation for the choice. Notice how long those subperiods are: 69, 55, and 81 years.

Siegel also acknowledged--I'm quite sure, although I've tried to find the actual quotation and failed--that the stability of US stock market returns are just a pragmatic observation, and that he doesn't have an explanation of it.
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Re: Why is stock market return so consistent over time?

Post by nisiprius »

Another caution. Don't be deceived by the implications of CAGR (compound average growth rate) differences looking smaller over longer periods of time. To see what they really mean, you need to compound them out for the period of time and see what the growth of $10,000 would be.

Here's, I've plotted the total growth of a $10,000 investment over thirty-year periods, at various starting times. This is inflation-corrected and dividends are included.

Image

Over the time period 1965-1994, $10,000 would have grown to $35,900.89
Over the time period 1932-1961, $10,000 would have grownt to $204,381.23.

Would you describe that as "consistent?"
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Re: Why is stock market return so consistent over time?

Post by Mountain Doc »

nisiprius wrote: Thu Aug 11, 2022 7:19 am Another caution. Don't be deceived by the implications of CAGR (compound average growth rate) differences looking smaller over longer periods of time. To see what they really mean, you need to compound them out for the period of time and see what the growth of $10,000 would be.

Here's, I've plotted the total growth of a $10,000 investment over thirty-year periods, at various starting times. This is inflation-corrected and dividends are included.

***

Over the time period 1965-1994, $10,000 would have grown to $35,900.89
Over the time period 1932-1961, $10,000 would have grownt to $204,381.23.

Would you describe that as "consistent?"
I like that visual, Nisiprius. However, is a log axis the best way to present this data? It seems like it mutes the variability you are trying to show.
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Re: Why is stock market return so consistent over time?

Post by dbr »

I would reinforce nisi's comment. The reporting of annualized average (Compound ANNUAL growth rate) is deceptive.

Given a fixed standard deviation of annual returns it is just math that the CAGR goes down with increasing time while the total return for the entire period goes up with increasing time. If the distribution of returns were normal the CAGR would be divided down by SQRT(time) and the compounded result would be multiplied up by SQRT(time). For real world stock results statistics get much more complicated due to serial correlation and lack of stationarity, and what the shape of the distribution of annual returns even is might be hard to see.

A primary feature in observing stock price charts is the obvious appearance of secular bull and bear markets.

On the other hand, it probably is true that the US market over an entire spectrum of more than a hundred years is pretty well fit by an exponential function at some time constant (rate of return).
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Re: Why is stock market return so consistent over time?

Post by deanmoriarty »

nisiprius wrote: Thu Aug 11, 2022 7:19 am
Over the time period 1965-1994, $10,000 would have grown to $35,900.89
Over the time period 1932-1961, $10,000 would have grownt to $204,381.23.

Would you describe that as "consistent?"
Your numbers are indeed thought-provoking, especially them being inflation adjusted.

What is the conclusion one should have from this? I would naively say: unless one plans to periodically and consistently invest over time AND significantly deleverage from equity to fixed income (a reasonable balance of nominal and inflation-protected) as they age, investing in the market for decades is a much wilder speculation than typically assumed?
Last edited by deanmoriarty on Thu Aug 11, 2022 9:25 am, edited 1 time in total.
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Re: Why is stock market return so consistent over time?

Post by dbr »

deanmoriarty wrote: Thu Aug 11, 2022 9:11 am
nisiprius wrote: Thu Aug 11, 2022 7:19 am
Over the time period 1965-1994, $10,000 would have grown to $35,900.89
Over the time period 1932-1961, $10,000 would have grownt to $204,381.23.

Would you describe that as "consistent?"
Your numbers are indeed thought-provoking, especially them being inflation adjusted.

What is the conclusion one should have from this? I would naively say: unless one plans to periodically and consistently invest over time AND significantly deleverage from equity to fixed income as they age, investing in the market for decades is a much wilder speculation than typically assumed?
Yes, the conclusion is that when you are born, work, retire, and die is far and away the largest determinant of your financial fate.

Note a similar data point is that if one compiles safe withdrawal rates from portfolios for 30 year retirements that number varies from a low of 4% in the late '60s to a high of 8% in the early '80s. The 4% SWR rule is based in assuming things might be as bad as they were for the 1966 retiree and be prepared. Of course one could get an even worse year, but the odds are it won't be that bad. Of course, why a year is bad or good is different every time.
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Re: Why is stock market return so consistent over time?

Post by Florida Orange »

Increases in population and productivity drive increases in corporate profits and GDP. How much are you willing to pay now for a percentage of those future profits? A P/E ratio of 14/1 means you're getting 7%. As the economy grows, people are willing to pay more for a company's stock, based on an expected increase in future earnings. In that sense, the price of the stock is always "front running" the economy by a few years. Sometimes people are optimistic and are willing to pay more, other times they're pessimistic and are willing to pay less. Over time, business profits grow and the stock price increases. In the short run, the price fluctuates based on changes in people's expectations of future earnings. In the long run, the stock market grows because the economy grows.
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Re: Why is stock market return so consistent over time?

Post by firebirdparts »

If the investment threshold the company uses to build productive assets is consistent, then I guess you would expect returns to be consistent. In my limited 40-year-long experience, that is the case, although the threshold is always nominal here at hugeco, while the actual cost of capital is going all over.

I suppose it's reasonable to think that "human nature" would lead us to set consistent investment thresholds in a business over generations of people.

I would always stress, though, that those guardrails and the channel through which the S&P moves for 100 years is still imaginary. It doesn't "have to" do whatever somebody says it has to do.
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Re: Why is stock market return so consistent over time?

Post by CyclingDuo »

dbr wrote: Thu Aug 11, 2022 9:21 am
deanmoriarty wrote: Thu Aug 11, 2022 9:11 am
nisiprius wrote: Thu Aug 11, 2022 7:19 am
Over the time period 1965-1994, $10,000 would have grown to $35,900.89
Over the time period 1932-1961, $10,000 would have grownt to $204,381.23.

Would you describe that as "consistent?"
What is the conclusion one should have from this? I would naively say: unless one plans to periodically and consistently invest over time AND significantly deleverage from equity to fixed income as they age, investing in the market for decades is a much wilder speculation than typically assumed?
Yes, the conclusion is that when you are born, work, retire, and die is far and away the largest determinant of your financial fate.
Yes, that is the conclusion!

We unfortunately do not have a say in the year we are born, and the subsequent journey known as utilizing our human capital where we save and invest from the income we retain by the spending of our human capital. It is what it is. We simply have to roll with it.

Or as Nick Maggiulli says in this blog post...

That’s the nature of luck. Sometimes you will be down on it and sometimes you will be up on it. Famine and fortune go hand in hand. If anything, that’s the most realistic investment result of all.
https://ofdollarsanddata.com/realistic- ... t-results/

Most of us have stories and plenty of memories of what our grandparents and parents went through during their journeys. WWI, Flu Pandemic, WWII, Great Depression, Vietnam the 1970's, etc... . Many of us are old enough to have experienced the inflation and interest rates in the 70's/80's, the bubble pop in 2000-03, the 9/11 attacks, the GFC, (and of course Covid) etc... to realize every generation gets to navigate a variety of events and factors throughout their investing journeys.

C'est la vie...

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Re: Why is stock market return so consistent over time?

Post by Apathizer »

makingmistakes wrote: Thu Aug 11, 2022 5:37 am
Apathizer wrote: Thu Aug 11, 2022 12:14 am I think you might be equating average with consistency. If the market returned 7% almost every year with very little variation that would be pretty remarkable and consistent. But 7% is an average and historically the returns have been all over the place. Some years have returned 30 plus percent others it's lost more than 20%.

I'm not sure why this would be considered remarkable. There are many investment vehicles attempting to maximize return. It just so happens that the global equity market produces the best returns of any passive investment. If bonds had better returns I suppose we could marvel at those instead.
I thought he’s saying it’s the averages, when taken over multiple time spans, that are consistent.
Consistency and average are different. For instance, if a basketball player averages 15 points per game, that doesn't necessarily mean they that's what they score consistently. For any particular game they might score 5, 20, 10, 30, 12... who knows. Some players do have fairly consistent numbers across games, others are widely inconsistent and might score 5 one game and 40 another.

Stock market returns seem to be a case of the latter. Some years it does exceptionally well, others there are significant losses, and there are others years it falls in between. Considering this, I'm not sure the OP's original question makes sense.
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Re: Why is stock market return so consistent over time?

Post by nisiprius »

Mountain Doc wrote: Thu Aug 11, 2022 9:02 amI like that visual, Nisiprius. However, is a log axis the best way to present this data? It seems like it mutes the variability you are trying to show.
I'm leaning over backwards not to exaggerate the point I'm trying to make. And I believe that linear axes on financial data are almost always inappropriate, and are usually used by people trying to persuade rather than inform.

(But I'm also constrained by Excel's support for log axes, which sucks... it would be more dramatic if I started the axis at $30,000 instead of $10,000, but then the tick marks and horizontal grid lines wouldn't make sense).
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Re: Why is stock market return so consistent over time?

Post by firebirdparts »

Apathizer wrote: Thu Aug 11, 2022 12:19 pm Consistency and average are different.
I think the question is actually intelligent, and neither of these words should been used. The question is really about neither of these concepts. Just an unfortunate couple of word choices descending into an uninteresting semantic argument about something that he didn't really mean to ask. But I admit that's entirely my opinion about what he meant.

Jo Money is fond of posting a chart which shows this in graphic form and I assume everyone is familiar with that. I took it as a "why does this chart look this way" question, and commented based on that view of it. Obviously we could have semantic arguments about that also.
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Re: Why is stock market return so consistent over time?

Post by mffl »

Apathizer wrote: Thu Aug 11, 2022 12:19 pm
makingmistakes wrote: Thu Aug 11, 2022 5:37 am
Apathizer wrote: Thu Aug 11, 2022 12:14 am I think you might be equating average with consistency. If the market returned 7% almost every year with very little variation that would be pretty remarkable and consistent. But 7% is an average and historically the returns have been all over the place. Some years have returned 30 plus percent others it's lost more than 20%.

I'm not sure why this would be considered remarkable. There are many investment vehicles attempting to maximize return. It just so happens that the global equity market produces the best returns of any passive investment. If bonds had better returns I suppose we could marvel at those instead.
I thought he’s saying it’s the averages, when taken over multiple time spans, that are consistent.
Consistency and average are different. For instance, if a basketball player averages 15 points per game, that doesn't necessarily mean they that's what they score consistently. For any particular game they might score 5, 20, 10, 30, 12... who knows. Some players do have fairly consistent numbers across games, others are widely inconsistent and might score 5 one game and 40 another.

Stock market returns seem to be a case of the latter. Some years it does exceptionally well, others there are significant losses, and there are others years it falls in between. Considering this, I'm not sure the OP's original question makes sense.
Great point.

I guess what I'm saying is that the basketball player in this analogy scores wildly different ppg each game, but averages 15ppg over a season. That in and of itself, of course, is useless information. But if that player's annual ppg from year to year ranges in a band from 13.5ppg to 16ppg each season, that's pretty consistent from season to season, even though it is NOT consistent from game to game.

There are multiple time scales here. I'm not suggesting the market is consistent year to year (obviously), but it starts to get closer the longer time periods you look at, and it is pretty consistent half century to half century. Now, half century timescales are unfortunately pretty useless to an average investor, but it's still appears as an interesting long term mean reversion. So many time scales you look at, you keep seeing 7, 7, 7. This wouldn't have to be the case just because the average is 7. The first 75 years could be flat followed by fantastic growth in the next 75.

I acknowledge that at some point the time scale becomes so long, it's the same as the time scale of available data, at which point saying the average is consistent is a tautology. Of course a player who plays one season at 15ppg has a consistent yearly average of 15ppg. It's a sample of one. But to split the available data in half, 1871 to 1946 is 6.40% and 1947 to 2021 is 7.91%. I see no reason for those two time periods to be so similar. I acknowledge that even these small differences add up to huge cumulative differences over time. I acknowledge that smaller timescales don't exhibit nearly as much consistency. But this still seems to be a pretty remarkable phenomenon given the wild swings in events across these two time periods. Maybe humans have a natural tendency to double their output once every 10 years? Or maybe humans have a natural tendency to find patterns where none exist. :)

At any rate, I've found this discussion fascinating so far. Thanks for everyone's input on this. Very thought provoking.

The one that scares me is that maybe this is more closely related to population growth over time than anything else, at which point at least we can all commiserate in the future dystopia together.
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Re: Why is stock market return so consistent over time?

Post by sureshoe »

Solve this post, win a Nobel Prize.
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Re: Why is stock market return so consistent over time?

Post by SimpleGift »

mffl wrote: Thu Aug 11, 2022 12:55 pm Maybe humans have a natural tendency to double their output once every 10 years?...

The one that scares me is that maybe this is more closely related to population growth over time than anything else, at which point at least we can all commiserate in the future dystopia together.
Humans over the last two centuries HAVE had a tendency to grow their output-per-capita, at least in the developed world. For countries not devastated by world war, the formula for consistent long-term stock returns has been:
  • Steady GDP Growth --> Steady Corporate Earnings --> Steady Stock Returns

    Image
    Note: Chart shows GDP-per-capita, so population growth is not a factor.
    Data source: Maddison
Looking ahead to the rest of the 21st century, in the broadest possible terms, as long as global GDP-per-capita continues to grow, there is reason to believe that global stock returns should follow pace. It's why we invest in corporate enterprise, to my mind.
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Re: Why is stock market return so consistent over time?

Post by snackdog »

7% is the natural return. If it were much higher too many people would pile in. If it were lower, nobody would bother.
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Re: Why is stock market return so consistent over time?

Post by PicassoSparks »

Valuethinker wrote: Thu Aug 11, 2022 3:22 am 2. Because of this, US stocks not only paid high dividends, but the other source of return, expansion of PE multiple, at least doubled over the course of the 20th century. That will be difficult (or impossible) to repeat.
I've seen this argument made many times before and kind of nodded my head along in agreement but for some reason I'm feeling contrarian today: Why do we think that PE multiples can't continue to rise? Is there some 'natural' or 'correct' PE ratio that we expect to mean-revert to? What do we expect the PE to be? Why do we have any expectation other than a random walk for PE ratios?
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Re: Why is stock market return so consistent over time?

Post by mffl »

SimpleGift wrote: Thu Aug 11, 2022 1:34 pm
mffl wrote: Thu Aug 11, 2022 12:55 pm Maybe humans have a natural tendency to double their output once every 10 years?...

The one that scares me is that maybe this is more closely related to population growth over time than anything else, at which point at least we can all commiserate in the future dystopia together.
Humans over the last two centuries HAVE had a tendency to grow their output-per-capita, at least in the developed world. For countries not devastated by world war, the formula for consistent long-term stock returns has been:
  • Steady GDP Growth --> Steady Corporate Earnings --> Steady Stock Returns

    Image
    Note: Chart shows GDP-per-capita, so population growth is not a factor.
    Data source: Maddison
Looking ahead to the rest of the 21st century, in the broadest possible terms, as long as global GDP-per-capita continues to grow, there is reason to believe that global stock returns should follow pace. It's why we invest in corporate enterprise, to my mind.
Fascinating chart, thank you!
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Re: Why is stock market return so consistent over time?

Post by DaufuskieNate »

I am reminded of Benjamin Graham's quote that in the short term, the market is a voting machine but in the long term it is a weighing machine. In the short term, the market can be subject to the animal spirits of humans trading on emotion. Ultimately, in the long term the market does a pretty good job of weighing the fundamental growth and profitability of companies.
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Re: Why is stock market return so consistent over time?

Post by Oicuryy »

My guess: 3.3% real GDP growth plus 3.4% profit reinvested. Volatility is due to speculators betting on price movements.

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Re: Why is stock market return so consistent over time?

Post by MarkRoulo »

mffl wrote: Wed Aug 10, 2022 11:57 pm ... snip ...
Is it a self fulfilling prophecy? Humanity expects 7% growth over the long term so it gets it? But does this phenomenon apply generally outside the US?

And then my entire adult life I've been told that the good times are over and we'll start seeing only 4% or 2% or even 0% real returns. Well, it may be prudent to plan for that, and these guys may end up being right at some point. But my adult life is 1998 to 2021, which is... 6.41%, despite including some really nasty surprises.

... snip ...
I think nisiprius has shown that the basic claim here (~6.5% real return over long-ish time periods) isn't even true in the US.

Using this investment calculator:
https://dqydj.com/nikkei-return-calculator/

for 1998 - 2021 I get a 4.2% annualized return for the Nikkei 225 (adjusted for inflation, dividends re-invested) measured in Yen (which is what a Japanese investor would see.

4.2% isn't terribly close to 6.4% when annualized over 20+ years.

So, no this phenomenon doesn't seem to apply outside the US.

[I'd try more international indexes, but I can't find any return calculators for them that don't work in dollars]

I'll note that the S&P 500 return calculator at the same site gives these annualized returns:

Jan 1998 - Dec 2021: 6.34% (pretty close to your 6.41%)
Jan 1998 - Aug 2022: 5.4% (Eight months more data and we no longer are seeing 6.41% annualized ... which is in line with Nisi's chart).
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Re: Why is stock market return so consistent over time?

Post by Wrench »

Florida Orange wrote: Thu Aug 11, 2022 9:35 am Increases in population and productivity drive increases in corporate profits and GDP. How much are you willing to pay now for a percentage of those future profits? A P/E ratio of 14/1 means you're getting 7%. As the economy grows, people are willing to pay more for a company's stock, based on an expected increase in future earnings. In that sense, the price of the stock is always "front running" the economy by a few years. Sometimes people are optimistic and are willing to pay more, other times they're pessimistic and are willing to pay less. Over time, business profits grow and the stock price increases. In the short run, the price fluctuates based on changes in people's expectations of future earnings. In the long run, the stock market grows because the economy grows.
I believe this is the correct answer. But I have always wondered what happens when the world wide population stops growing? At some point it must as the earth will not support an infinite number of people. At some point it will stabilize at a more or less constant value (absent global disasters like world wars or pandemics that would slow the process but it would still likely happen). Will productivity improvements make up for the lack of population growth? Or will the world reach an "equilibrium" financial state where total world wide GDP and total corporate profits are approximately constant? There will of course still be winners, but nearly equally offset by losers? Or perhaps by that time, humanity will continue to grow by moving off the earth by colonizing the moon, Mars, space, etc.?

I will not be around to see any of this, but I am pretty certain my young grandchildren will, especially since it is likely centenarians will be common by that time ...

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Re: Why is stock market return so consistent over time?

Post by Lawrence of Suburbia »

This thread is scaring me ...
nisiprius wrote: Thu Aug 11, 2022 7:19 am[...]

Over the time period 1965-1994, $10,000 would have grown to $35,900.89
Over the time period 1932-1961, $10,000 would have grownt to $204,381.23.

Would you describe that as "consistent?"
Please sir, may I go back to 1932 and invest my paltry nest-egg ...?
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Re: Why is stock market return so consistent over time?

Post by Florida Orange »

Wrench, it's limited only by the amount of available resources in the universe. Resources includes, but is not limited to, human imagination and ingenuity, including ideas for new products and services and increases in efficiency and productivity, driven mostly by advances in technology. For all practical purposes, it's infinite.
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Re: Why is stock market return so consistent over time?

Post by incognito_man »

sureshoe wrote: Thu Aug 11, 2022 1:10 pm Solve this post, win a Nobel Prize.
This.

I feel like this is another way of phrasing the important question of "why are the important fundamentals that drive economic growth, and to what respective degree".

It's akin to figure out what gravity actually is.
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Re: Why is stock market return so consistent ove

Post by PicassoSparks »

nisiprius wrote: Thu Aug 11, 2022 7:19 am Another caution. Don't be deceived by the implications of CAGR (compound average growth rate) differences looking smaller over longer periods of time. To see what they really mean, you need to compound them out for the period of time and see what the growth of $10,000 would be.

Here's, I've plotted the total growth of a $10,000 investment over thirty-year periods, at various starting times. This is inflation-corrected and dividends are included.

Image

Over the time period 1965-1994, $10,000 would have grown to $35,900.89
Over the time period 1932-1961, $10,000 would have grownt to $204,381.23.

Would you describe that as "consistent?"
What’s stunning to me is the degree of difference between neighbouring periods. Start in 1967 instead of 1965 and nearly double your money. Start in 1979 instead of 1978 and halve it. Since the people finishing in 2007 didn’t cash out 100% on the end date, they also saw their nest egg become substantially less than they thought it was.

This is partially a lesson in how variable returns have been but also a lesson in how misleading single-period comparisons can be and how sensitive they are to start and end dates.
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Re: Why is stock market return so consistent over time?

Post by mffl »

Florida Orange wrote: Thu Aug 11, 2022 7:24 pm Wrench, it's limited only by the amount of available resources in the universe. Resources includes, but is not limited to, human imagination and ingenuity, including ideas for new products and services and increases in efficiency and productivity, driven mostly by advances in technology. For all practical purposes, it's infinite.
Yes, but getting off this particular rock in any scalable, profitable, efficient manner may be particularly difficult. The next rock full of resources is quite some distance from the one you're sitting on.

It does make you wonder what's next technologically that might support the next 75 years of 7% real growth. Certainly some (but not most of us) could have predicted cell phones or the internet, but I doubt many correctly predicted the exact ways it would impact our lives. I wonder what's next.
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Re: Why is stock market return so consistent over time?

Post by mffl »

Wrench wrote: Thu Aug 11, 2022 6:22 pm
Florida Orange wrote: Thu Aug 11, 2022 9:35 am Increases in population and productivity drive increases in corporate profits and GDP. How much are you willing to pay now for a percentage of those future profits? A P/E ratio of 14/1 means you're getting 7%. As the economy grows, people are willing to pay more for a company's stock, based on an expected increase in future earnings. In that sense, the price of the stock is always "front running" the economy by a few years. Sometimes people are optimistic and are willing to pay more, other times they're pessimistic and are willing to pay less. Over time, business profits grow and the stock price increases. In the short run, the price fluctuates based on changes in people's expectations of future earnings. In the long run, the stock market grows because the economy grows.
I believe this is the correct answer. But I have always wondered what happens when the world wide population stops growing? At some point it must as the earth will not support an infinite number of people. At some point it will stabilize at a more or less constant value (absent global disasters like world wars or pandemics that would slow the process but it would still likely happen). Will productivity improvements make up for the lack of population growth? Or will the world reach an "equilibrium" financial state where total world wide GDP and total corporate profits are approximately constant? There will of course still be winners, but nearly equally offset by losers? Or perhaps by that time, humanity will continue to grow by moving off the earth by colonizing the moon, Mars, space, etc.?

I will not be around to see any of this, but I am pretty certain my young grandchildren will, especially since it is likely centenarians will be common by that time ...

Wrench
Yes, great points. Population growth has some genetic reasons to continue at a somewhat stable, exponential rate. Changes in this rate can happen, but it would stand to reason that these changes could take centuries to occur (changes in life expectancy due to medical advances, the pill, reduction in children due to increased wealth, some of which are offsetting each other). Then the portion that's productivity growth could be much more irregular, but the population growth baseline masks the irregularity in productivity growth. It would make sense, however, that productivity growth would still usually remain positive (but perhaps only moderately so) barring truly cataclysmic events, so that further narrows the band of outcomes.

That said, I actually do believe that population growth is reaching a series of inflection points, which would be bad news for our 7% mean return, but then again we may also be reaching a different series of upwardly exponential technological inflection points, so maybe that offsets. Who knows.

I would also like to acknowledge some of the other posts showing that even over 30 year timespans this isn't as consistent as it seems. I still think there's something going on here, but maybe it's on even longer timescales than 30 years, which may make this phenomenon less useful but not less odd.

ETA: Also, SimpleGift's GDP growth chart may suggest that the thing that's stubbornly consistent over time here is per capita GDP growth, rather than the stock market per se, but since the stock market is ultimately related to GDP growth, it may provide the mean for the stock market to *eventually* revert to. And if per capita GDP growth is pretty stable, and population growth is pretty stable, overall GDP growth is then going to be pretty stable. Then as Florida Orange stated, the stock market is front running the economy by a few years, and then I nisiprius said that very small changes in CAGR over long periods means gigantic differences in the absolute numbers (referring to stock market returns, not economic growth, but it would be true in both cases). So the stock market in the short term is responding wildly to tiny differences in predicted future growth, but ends up finally reverting to whatever economic growth ended up being, which ends up being relatively consistent. Dunno.
Last edited by mffl on Thu Aug 11, 2022 10:36 pm, edited 2 times in total.
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Re: Why is stock market return so consistent over time?

Post by Florida Orange »

mffl, I wonder too. But it seems to me that advancement leads to more advancement, innovation leads to more innovation, increasing opportunities leads to even more opportunities. Even if we assume zero population growth, the potential for global economic growth and global increase in wealth is huge. The only real limit is the limit of human imagination and ambition.
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Re: Why is stock market return so consistent over time?

Post by SimpleGift »

mffl wrote: Thu Aug 11, 2022 10:09 pm So the stock market in the short term is responding wildly to tiny differences in predicted future growth, but ends up finally reverting to whatever economic growth ended up being, which ends up being relatively consistent.
Broadly speaking, yes. In fact, this very insight was one of John Bogle's favorites. In his own words:
John Bogle, in "The (Non) Lessons of History," 2014, wrote:Over the very long run, it is the economics of investing — enterprise — that has been virtually entirely responsible for the total return on stocks. The evanescent emotions of investing — speculation — that are so important over the short run, have ultimately proven to be virtually meaningless.
On the scale of centuries, we can look at global GDP growth as a fundamental driver of stock returns. Or, we can look at the growth of earnings-per-share. Certainly stock returns often diverge from these basic economic drivers in the short run — but it's these underlying forces of global growth that eventually sway the markets over the long run.
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Re: Why is stock market return so consistent over time?

Post by Valuethinker »

PicassoSparks wrote: Thu Aug 11, 2022 3:22 pm
Valuethinker wrote: Thu Aug 11, 2022 3:22 am 2. Because of this, US stocks not only paid high dividends, but the other source of return, expansion of PE multiple, at least doubled over the course of the 20th century. That will be difficult (or impossible) to repeat.
I've seen this argument made many times before and kind of nodded my head along in agreement but for some reason I'm feeling contrarian today: Why do we think that PE multiples can't continue to rise? Is there some 'natural' or 'correct' PE ratio that we expect to mean-revert to? What do we expect the PE to be? Why do we have any expectation other than a random walk for PE ratios?
Partly it is just an empirical observation that they revert to the mean.

Either dramatically, as in 1929-1933 ish. Or 2008-09. OR less dramatically as in 1966-1981 -- just a steady drip-drip of fading back. Japan 1990-present day.

But also one's assumptions about the underlying economy:

- corporate profits growth can be achieved against labor share of income. Can that go on forever? Also EPS growth via financial engineering (share buybacks, normally financed with cheap debt)

- at the end of the day, interest rates drive this. If real interest rates are low, stocks should be on high PEs. Earnings way out in the future, discounted to the present, still have value - that's what a high current PE means.

However if real interest rates rise, then it's not so pleasant to sit in some biotech stock that won't make profits before the 2030s. PE multiples tend to compress as high flyers drop whereas "value" stocks stay at low PEs. There is multiple compression which also lowers the average PE of the market.

Rising real interest rates hurt stock returns. At least in theory, they should hurt high PE stocks more. That certainly was true of the Tech-Media-Telecoms stocks in 2000-03. And of tech stocks in the last 12 months.
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Re: Why is stock market return so consistent over time?

Post by Valuethinker »

mffl wrote: Thu Aug 11, 2022 10:09 pm
Wrench wrote: Thu Aug 11, 2022 6:22 pm
Florida Orange wrote: Thu Aug 11, 2022 9:35 am Increases in population and productivity drive increases in corporate profits and GDP. How much are you willing to pay now for a percentage of those future profits? A P/E ratio of 14/1 means you're getting 7%. As the economy grows, people are willing to pay more for a company's stock, based on an expected increase in future earnings. In that sense, the price of the stock is always "front running" the economy by a few years. Sometimes people are optimistic and are willing to pay more, other times they're pessimistic and are willing to pay less. Over time, business profits grow and the stock price increases. In the short run, the price fluctuates based on changes in people's expectations of future earnings. In the long run, the stock market grows because the economy grows.
I believe this is the correct answer. But I have always wondered what happens when the world wide population stops growing? At some point it must as the earth will not support an infinite number of people. At some point it will stabilize at a more or less constant value (absent global disasters like world wars or pandemics that would slow the process but it would still likely happen). Will productivity improvements make up for the lack of population growth? Or will the world reach an "equilibrium" financial state where total world wide GDP and total corporate profits are approximately constant? There will of course still be winners, but nearly equally offset by losers? Or perhaps by that time, humanity will continue to grow by moving off the earth by colonizing the moon, Mars, space, etc.?

I will not be around to see any of this, but I am pretty certain my young grandchildren will, especially since it is likely centenarians will be common by that time ...

Wrench
Yes, great points. Population growth has some genetic reasons to continue at a somewhat stable, exponential rate. Changes in this rate can happen, but it would stand to reason that these changes could take centuries to occur (changes in life expectancy due to medical advances, the pill, reduction in children due to increased wealth, some of which are offsetting each other). Then the portion that's productivity growth could be much more irregular, but the population growth baseline masks the irregularity in productivity growth. It would make sense, however, that productivity growth would still usually remain positive (but perhaps only moderately so) barring truly cataclysmic events, so that further narrows the band of outcomes.

That said, I actually do believe that population growth is reaching a series of inflection points, which would be bad news for our 7% mean return, but then again we may also be reaching a different series of upwardly exponential technological inflection points, so maybe that offsets. Who knows.
Population growth is not exponential. Humans are not bacteria.

People study this a lot. There's a whole field of demography. Our World in Data can generate some neat charts.

Demography: A Very Short Introduction by Sarah Harper

https://global.oup.com/academic/product ... 0198725732

is an excellent place to start.

Total Fertility ratio falls with development. In fact it's one of the key reasons for economic development.

If you look at countries as diverse as Bangladesh and Ireland, you can see the demographic dividend at work. Falling birthrate leads to falling dependency ratio (more workers per economically inactive people) and rising GDP per capita. Which in turn leads to falling birthrates. Rinse and repeat. China's experiment with the 1 Child policy is unique in history, but there's no reason to think China was not on the same course -- however they brought it forward by 20 years. Singapore has a very low birthrate - to show you what an advanced Asian country will do (so does Taiwan, one of the lowest in the world).

Total Fertility Ratio in India has fallen from over 6 to about 3.1, and in urban India it's actually below replacement (about 1.9 from memory).

Iran has done something similar since 1979. Move to a TFR below 2.1 ie below replacement level.

Extensions in life expectancy are part of this. Average global life expectancy has roughly doubled since 1900. Even in most developing countries, it is something like 60 years now. That does mean higher population (in the short term) but it also means more economic growth, more workers. And TFR tends to drop (its strongest correlation is with female literacy & female entry into the formal workforce; but there's also a correlation with life expectancy extension).

Thus world population is likely to peak some time after mid century.

2 big question marks:

- what happens in sub Saharan Africa, where TFRs have dropped but you still have very much the underdeveloped birth rates. Africans are going to be 1/4 all humans some time in the 21st century.

- what does climate change do to this, as parts of the world near the Equator start to become increasingly uninhabitable? Where do all these people go?

(There are some places in the Middle East which are similar to Sub Saharan Africa, but generally their populations are much smaller. The extension of driving rights to women in Saudi is aimed to bring more women into the workforce, as it is currently a very low percentage (around 40%)).
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Re: Why is stock market return so consistent over time?

Post by seajay »

Self fulfilling prophesy.

For 18th/19th centuries gold and money were pegged, finite gold induced 0% broad inflation and if instead of holding gold you converted that to money and lent it to the state it was like the state paying you for it to securely store your gold. With 0% average inflation the interest paid was a real rate of return and broadly averaged 4%. Most investors just bought bonds.

When that ended in the earlier part of the 20th century, US took over the helm from the British, so the inclination was for bonds to broadly yield 0% real, no longer lenders winning, but a tendency towards 50/50 borrowers/lenders win. For that a 2% inflation type broad situation arose. For real returns investors had to look elsewhere, such as to stocks, and prices were measured/set with historic 4% real in mind, but expectations of a bit more in reflection of the greater volatility/risk. If investors predict they'll get less than a 'fair' return they'll look elsewhere, if valuations look generous they pile in. Which still holds to the present day, many anticipate 4% SWR worst case, on average expecting additional rewards on top of that.

The average business might make 15%/year profits, so investors typically bid up the share prices to twice book-value. 7.5% earnings yield. Enough for 4% payout/withdrawals, and offset inflation and taxation. If projected earnings decline so investors lower the share prices, if projected earnings look great they bid up prices.

The average stock borrows (corporate bonds or otherwise) amounts equivalent to around half of its book-value, and with share prices at twice book-value that's like 25% of every $1 deployed to buy shares in short bond exposure. As long or short bonds broadly washes, some investors opt for 80/20 stock/bonds to leave a more pure just stock exposure. Others opine that to be wasteful use of capital, in effect 20% of ones own capital being used to borrow and lend to oneself for 0% nominal, a loss in real terms. But it does make the ride smoother and some like that comfort.
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Re: Why is stock market return so consistent over time?

Post by Small Law Survivor »

I was born May 1951. According to this site, the nominal return from May '51 to date (dividends reinvested) is 10.979%.

The real return is 7.252.

https://dqydj.com/sp-500-return-calculator/
72 yrs. mostly-retired lawyer. Boglehead since day 1 (and M* Diehard long before that) under various names
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Re: Why is stock market return so consistent over time?

Post by mffl »

Valuethinker wrote: Fri Aug 12, 2022 4:49 am
mffl wrote: Thu Aug 11, 2022 10:09 pm
Wrench wrote: Thu Aug 11, 2022 6:22 pm
Florida Orange wrote: Thu Aug 11, 2022 9:35 am Increases in population and productivity drive increases in corporate profits and GDP. How much are you willing to pay now for a percentage of those future profits? A P/E ratio of 14/1 means you're getting 7%. As the economy grows, people are willing to pay more for a company's stock, based on an expected increase in future earnings. In that sense, the price of the stock is always "front running" the economy by a few years. Sometimes people are optimistic and are willing to pay more, other times they're pessimistic and are willing to pay less. Over time, business profits grow and the stock price increases. In the short run, the price fluctuates based on changes in people's expectations of future earnings. In the long run, the stock market grows because the economy grows.
I believe this is the correct answer. But I have always wondered what happens when the world wide population stops growing? At some point it must as the earth will not support an infinite number of people. At some point it will stabilize at a more or less constant value (absent global disasters like world wars or pandemics that would slow the process but it would still likely happen). Will productivity improvements make up for the lack of population growth? Or will the world reach an "equilibrium" financial state where total world wide GDP and total corporate profits are approximately constant? There will of course still be winners, but nearly equally offset by losers? Or perhaps by that time, humanity will continue to grow by moving off the earth by colonizing the moon, Mars, space, etc.?

I will not be around to see any of this, but I am pretty certain my young grandchildren will, especially since it is likely centenarians will be common by that time ...

Wrench
Yes, great points. Population growth has some genetic reasons to continue at a somewhat stable, exponential rate. Changes in this rate can happen, but it would stand to reason that these changes could take centuries to occur (changes in life expectancy due to medical advances, the pill, reduction in children due to increased wealth, some of which are offsetting each other). Then the portion that's productivity growth could be much more irregular, but the population growth baseline masks the irregularity in productivity growth. It would make sense, however, that productivity growth would still usually remain positive (but perhaps only moderately so) barring truly cataclysmic events, so that further narrows the band of outcomes.

That said, I actually do believe that population growth is reaching a series of inflection points, which would be bad news for our 7% mean return, but then again we may also be reaching a different series of upwardly exponential technological inflection points, so maybe that offsets. Who knows.
Population growth is not exponential. Humans are not bacteria.

People study this a lot. There's a whole field of demography. Our World in Data can generate some neat charts.

Demography: A Very Short Introduction by Sarah Harper

https://global.oup.com/academic/product ... 0198725732

is an excellent place to start.

Total Fertility ratio falls with development. In fact it's one of the key reasons for economic development.

If you look at countries as diverse as Bangladesh and Ireland, you can see the demographic dividend at work. Falling birthrate leads to falling dependency ratio (more workers per economically inactive people) and rising GDP per capita. Which in turn leads to falling birthrates. Rinse and repeat. China's experiment with the 1 Child policy is unique in history, but there's no reason to think China was not on the same course -- however they brought it forward by 20 years. Singapore has a very low birthrate - to show you what an advanced Asian country will do (so does Taiwan, one of the lowest in the world).

Total Fertility Ratio in India has fallen from over 6 to about 3.1, and in urban India it's actually below replacement (about 1.9 from memory).

Iran has done something similar since 1979. Move to a TFR below 2.1 ie below replacement level.

Extensions in life expectancy are part of this. Average global life expectancy has roughly doubled since 1900. Even in most developing countries, it is something like 60 years now. That does mean higher population (in the short term) but it also means more economic growth, more workers. And TFR tends to drop (its strongest correlation is with female literacy & female entry into the formal workforce; but there's also a correlation with life expectancy extension).

Thus world population is likely to peak some time after mid century.

2 big question marks:

- what happens in sub Saharan Africa, where TFRs have dropped but you still have very much the underdeveloped birth rates. Africans are going to be 1/4 all humans some time in the 21st century.

- what does climate change do to this, as parts of the world near the Equator start to become increasingly uninhabitable? Where do all these people go?

(There are some places in the Middle East which are similar to Sub Saharan Africa, but generally their populations are much smaller. The extension of driving rights to women in Saudi is aimed to bring more women into the workforce, as it is currently a very low percentage (around 40%)).
Agreed. I'm not at all predicting that population growth will continue exponentially and unabated forever. You laid out many reasons why it's already started to slow many places and will likely peak in the coming decades and then total population may even start to decrease a bit!

But if we're purely looking backwards, population growth as an exponential factor is a pretty useful observation:

Image

The above is US population growth. World population growth looks similar.

If this trend is about to change, and it looks like it is, it's interesting to wonder how much of an effect that will have on long term economic trends.
seajay
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Re: Why is stock market return so consistent ove

Post by seajay »

PicassoSparks wrote: Thu Aug 11, 2022 8:28 pm
nisiprius wrote: Thu Aug 11, 2022 7:19 am Another caution. Don't be deceived by the implications of CAGR (compound average growth rate) differences looking smaller over longer periods of time. To see what they really mean, you need to compound them out for the period of time and see what the growth of $10,000 would be.

Here's, I've plotted the total growth of a $10,000 investment over thirty-year periods, at various starting times. This is inflation-corrected and dividends are included.

Image

Over the time period 1965-1994, $10,000 would have grown to $35,900.89
Over the time period 1932-1961, $10,000 would have grownt to $204,381.23.

Would you describe that as "consistent?"
What’s stunning to me is the degree of difference between neighbouring periods. Start in 1967 instead of 1965 and nearly double your money. Start in 1979 instead of 1978 and halve it. Since the people finishing in 2007 didn’t cash out 100% on the end date, they also saw their nest egg become substantially less than they thought it was.

This is partially a lesson in how variable returns have been but also a lesson in how misleading single-period comparisons can be and how sensitive they are to start and end dates.
CAGR is start/end date sensitive. Use linest(ln(data range .... instead slope of the exponential trend line assuming log scaled data.

Much of investing is simply the reduction of concentration risk, and averaging, as the average is 'good enough'. Even Buffett who likes just stocks suggests to have averaged in over time, and for lump sums to not lump-in but average in. The paradox there however is that buy and hold is no different to the daily cost-less lumping in and the solution to that is to blend high and low volatility assets (typically stocks and bonds) along with periodic rebalancing (trading to add-low/reduce-high 'average').

Historic worst case start years for drawdown will typically follow great gain periods, historic best case start years for drawdowns will typically follow poor gain periods. All broadly washes on average. If you retire at a peak, large/fast gains having been achieved such that you have much more than might otherwise have been the case, its better to assume below average withdrawal rate support (SWR %). If you retire following a decade or two of poor/low rewards, then the chances are that you could use a above average SWR %.
Walkure
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Re: Why is stock market return so consistent over time?

Post by Walkure »

deanmoriarty wrote: Thu Aug 11, 2022 9:11 am
nisiprius wrote: Thu Aug 11, 2022 7:19 am
Over the time period 1965-1994, $10,000 would have grown to $35,900.89
Over the time period 1932-1961, $10,000 would have grownt to $204,381.23.

Would you describe that as "consistent?"
Your numbers are indeed thought-provoking, especially them being inflation adjusted.

What is the conclusion one should have from this? I would naively say: unless one plans to periodically and consistently invest over time AND significantly deleverage from equity to fixed income (a reasonable balance of nominal and inflation-protected) as they age, investing in the market for decades is a much wilder speculation than typically assumed?
I think part of the reason we perceive market returns as more stable/consistent than Nisi's chart would suggest is precisely because virtually everyone fits your naive "unless" case. I'd like to see a similar chart where, instead of growth of 10,000 we see growth of 1,000 a year for 30 years. I suspect that (1) the outcomes will have a much narrower dispersal (2) the very worst years in the lump sum chart will NOT be the worst DCA years as they bought more low for longer.
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