1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat. Why?

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1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat. Why?

Post by docneil88 » Sat Sep 14, 2013 6:16 pm

From an April 11, 2006 article by Mark Hulbert at http://www.marketwatch.com/story/earnin ... erspective :
According to data compiled by Yale Economics Prof. Robert Shiller, earnings per share on the S&P 500 grew at a 3.8% annualized rate between 1874 and 2004. In inflation-adjusted terms, the growth rate was 1.7% annualized.

...When I mention these numbers in seminars I give, I receive no end of protestations. Surely these numbers are too low, I'm told. How else could stocks have provided an 11% annualized nominal total return over the long term, and nearly a 7% annualized real return? The answers to their protests are instructive. There are two reasons why stock portfolios have grown faster than earnings, and neither provides much encouragement today.

The first is dividends. The S&P 500's average dividend yield since 1874, according to Prof. Shiller's data, is about 4.7%. In other words, nearly half of stocks' long-term total return has come from dividends. [Note. As of 9/14/2013, the dividend yield of the S&P 500 is 1.97%. Source: http://www.multpl.com/s-p-500-dividend-yield/ ]

...The other factor besides dividends that accounts for why the stock market has risen faster than earnings is an expansion in the price/earnings ratio. This is hardly an earth-shattering insight, of course. It just means that if investors are willing to pay more for a dollar of earnings, the market can go up even when earnings do not. Since 1874, the S&P 500's P/E ratio has nearly doubled. Can we expect it to double again from today's levels? Anything is possible, of course. But that strikes me as highly unlikely.
One question the above article does not address is why or how did the S&P500 EPS grow annualized 1.7% points greater than inflation from 1874-2004 even after paying out average dividends per year of 4.7%? I think that part of the answer is an annualized increase in productivity over that period that is much higher than inflation as well as an annualized increase in the median or average wages that is significantly less than the annualized increase in productivity. But I haven't found productivity or wage figures going back nearly as far as 1874. However, I did find this at http://www.huffingtonpost.com/2011/03/1 ... 37814.html :
Between 1979 and 2009, EPI [the Economic Policy Institute] says, U.S. productivity increased by 80 percent [non-annualized], while the hourly wage of the median worker has only gone up by 10.1 percent [non-annualized].
Best, Neil

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Re: 1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat.

Post by nisiprius » Sat Sep 14, 2013 7:13 pm

Another question that badly needs to be answered is how it is possible that "earnings per share on the S&P 500 grew at a 3.8% annualized rate between 1874 and 2004" when the S&P 500 was only created in 1957?

The Ibbotson SBBI 2010 Classic Yearbook for the description of their "large company stocks" data, they say simply that it is based on the "Standard and Poor's Composite Index" which "prior to March 1957 consisted of 90 of the largest stocks."

However, even here there is a problem:

Standard and Poor's was only created in 1941, by the merger of the Standard Statistics Bureau and Poor's Publishing.

The predecessor to the S&P 500, that 90-stock index was created in 1923. But I haven't yet succeeded in finding out what it was called--probably either the Standard's average or the Poor's average, but not the "Standard & Poor's" average!

The Ibbotson volume refers to data from "Standard and Poor's Trade and Securities Statistics from January 1926-February 1928." I don't know, I don't know... does it seem possible that those firms were publishing something under the name "Standard and Poor's" thirteen years before the merged? Naaaah, I don't believe it.

Meanwhile... what was the "S&P 500" before 1923, i.e. before the creation of the 90-stock predecessor to the S&P 500?

This may sound like nitpicking--oh, very well, it is nitpicking--but it indicates a degree of carelessness on the part of people presenting historical data that makes you wonder how careful they have been about the data itself.
Last edited by nisiprius on Sat Sep 14, 2013 7:33 pm, edited 1 time in total.
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Re: 1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat.

Post by stevewolfe » Sat Sep 14, 2013 7:33 pm

nisiprius wrote:Meanwhile... what was the "S&P 500" before 1923, when there was not even a Standard's, a Poor's or a Standard's and Poor's 90-stock index?

This may sound like nitpicking--oh, very well, it is nitpicking--but it indicates a degree of carelessness on the part of people presenting historical data that makes you wonder how careful they have been about the data itself.
The only thing you can be certain about Nisi is that over that whole time, small cap value stocks outperformed by 4% or so per anum by comparison.... :oops:

*kidding*

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Re: 1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat.

Post by nisiprius » Sat Sep 14, 2013 7:49 pm

What's kind of interesting is that I did try some Google Books searches before 1950, and some Boston Globe searches before 1950, and it is rather amazing that while both of them turn up a fair number of references to "Standard and Poor's," they are just business reports--in words--on various sectors and businesses. The first hit I could find that mentions the average is a 1959 Boston Globe reference to the "500-stock average of Standard and Poor's."

In contrast, "Dow Jones Industrial Average" turned up scores of relevant hits in the 1930s.

I almost get the impression that even if S&P was calculating and maintaining the 90-stock average before 1957, nobody was paying much attention to it. I wonder if there was some humongous marketing push by S&P, concurrent with the expansion to 500 stocks.

I'd be very curious if other people would try poking around for news or other articles mentioning the pre-1957 S&P index, and what it was called--particularly before Standard merged with Poor's.
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Re: 1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat.

Post by peachpeak » Sun Sep 15, 2013 10:35 am

docneil88 wrote:One question the above article does not address is why or how did the S&P500 EPS grow annualized 1.7% points greater than inflation from 1874-2004 even after paying out average dividends per year of 4.7%? I think that part of the answer is an annualized increase in productivity over that period that is much higher than inflation as well as an annualized increase in the median or average wages that is significantly less than the annualized increase in productivity.
If the total productivity of a company increases by 2% over inflation, then both employee wages and company earnings can increase by 2%.

Mathematically, if z=x+y, then 2z=2(x+y), where z is total income and x is the employee share of income and y is the corporate share of income.

Sometimes, as you point out, corporate earnings rose faster than wages (1979-present). Other times (1949-1979) wages rose faster than corporate earnings.

Another question: If real GDP grew by 3.1% and real earnings only grew by 1.7%, then where is the difference? I suspect company insiders and the financial sector pocketed some of it.

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Re: 1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat.

Post by Clive » Sun Sep 15, 2013 12:33 pm

docneil88 wrote: One question the above article does not address is why or how did the S&P500 EPS grow annualized 1.7% points greater than inflation from 1874-2004 even after paying out average dividends per year of 4.7%?
Choice of start and end dates can have a significant bearing.

Using Shiller's data and re-basing both real share price and real earnings to a 1.0 value as of June 1877

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Re: 1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat.

Post by Ice-9 » Sun Sep 15, 2013 1:03 pm

nisiprius wrote: Meanwhile... what was the "S&P 500" before 1923, i.e. before the creation of the 90-stock predecessor to the S&P 500?
Interesting question. I know retirement calculators that post historical returns seem to universally use 1871 as a starting date. And you can download a spreadsheet with a chart of "S&P 500 Stock Price" from 1871 on Robert Shiller's website, http://irrationalexhuberance.com . I've never read his book of the same name, so I'm not sure if it might give some details on what the numbers before 1923 might represent.

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Re: 1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat.

Post by Valuethinker » Sun Sep 15, 2013 4:18 pm

docneil88 wrote:From an April 11, 2006 article by Mark Hulbert at http://www.marketwatch.com/story/earnin ... erspective :
According to data compiled by Yale Economics Prof. Robert Shiller, earnings per share on the S&P 500 grew at a 3.8% annualized rate between 1874 and 2004. In inflation-adjusted terms, the growth rate was 1.7% annualized.

...When I mention these numbers in seminars I give, I receive no end of protestations. Surely these numbers are too low, I'm told. How else could stocks have provided an 11% annualized nominal total return over the long term, and nearly a 7% annualized real return? The answers to their protests are instructive. There are two reasons why stock portfolios have grown faster than earnings, and neither provides much encouragement today.

The first is dividends. The S&P 500's average dividend yield since 1874, according to Prof. Shiller's data, is about 4.7%. In other words, nearly half of stocks' long-term total return has come from dividends. [Note. As of 9/14/2013, the dividend yield of the S&P 500 is 1.97%. Source: http://www.multpl.com/s-p-500-dividend-yield/ ]

...The other factor besides dividends that accounts for why the stock market has risen faster than earnings is an expansion in the price/earnings ratio. This is hardly an earth-shattering insight, of course. It just means that if investors are willing to pay more for a dollar of earnings, the market can go up even when earnings do not. Since 1874, the S&P 500's P/E ratio has nearly doubled. Can we expect it to double again from today's levels? Anything is possible, of course. But that strikes me as highly unlikely.
One question the above article does not address is why or how did the S&P500 EPS grow annualized 1.7% points greater than inflation from 1874-2004 even after paying out average dividends per year of 4.7%? I think that part of the answer is an annualized increase in productivity over that period that is much higher than inflation as well as an annualized increase in the median or average wages that is significantly less than the annualized increase in productivity. But I haven't found productivity or wage figures going back nearly as far as 1874. However, I did find this at http://www.huffingtonpost.com/2011/03/1 ... 37814.html :
Between 1979 and 2009, EPI [the Economic Policy Institute] says, U.S. productivity increased by 80 percent [non-annualized], while the hourly wage of the median worker has only gone up by 10.1 percent [non-annualized].
Best, Neil

I feel very confused here:

- dividend yield is DPS/ price per share. Earnings or profits are what dividends are paid out of: the payout ratio measures the fraction of EPS paid out as DPS (DPS/ EPS)


- dividends are paid out of earnings per share. In the long run, DPS and EPS growth have to be equal. If DPS growth exceeds EPS growth (payout ratio = EPS/ DPS so falls to be below 1.0) then the market has to cut dividends, it is paying out finite retained earnings

(converse case, EPS growth exceeds DPS growth, then payout ratio falls constantly. That's theoretically possible, see Japan in 1990 (1% yield) or US in 2000 (2% yield). History suggests it does not last forever, although share buybacks and hostile takeovers (which cash out shareholders) provide possible alternative routes).

- productivity growth does not guarantee corporate earnings growth. In a purely competitive industry, productivity growth does not convey higher productivity, long run, because it is duplicated by new entrants. In fact it is slow changing industries like tobacco that have produced the best shareholder returns.

-when we speak of PE doubling, we are also speaking of dividend yield halving (assuming constant payout ratio)

The formula Shiller is using is

return = current dividend yield + dividend growth + speculative return (fall in DY)

If we assume DPS growth = EPS growth long run, the middle term becomes earnings growth *per share*-- that's important in the age of the stock buyback.

So the reason stocks have returned as they have since the 19th century:

- yield started high-- probably 6-7%
- dividend aka earnings growth was good, a function of rising GDP (I think it's actually GDP per capita, but I cannot make a sophisticated argument for that, but my sense is corporates do well if individuals do well, in the long run, ie there is genuine progress)
- yield fell, in that the PE (the earnings yield, E/P, at a constant payout is just the dividend yield) of the market doubled over the period (at least)
Last edited by Valuethinker on Sun Sep 15, 2013 4:22 pm, edited 1 time in total.

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Re: 1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat.

Post by Valuethinker » Sun Sep 15, 2013 4:21 pm

docneil88 wrote: One question the above article does not address is why or how did the S&P500 EPS grow annualized 1.7% points greater than inflation from 1874-2004 even after paying out average dividends per year of 4.7%?
Please see my other post.

These questions are only indirectly related.

Profits (divided by shares in issue) grew over that time period by 1.7% above inflation.

That is irrespective of your payout ratio (DPS/ EPS) which gives you your yield (DPS/ share price).
I think that part of the answer is an annualized increase in productivity over that period that is much higher than inflation as well as an annualized increase in the median or average wages that is significantly less than the annualized increase in productivity. But I haven't found productivity or wage figures going back nearly as far as 1874. However, I did find this at http://www.huffingtonpost.com/2011/03/1 ... 37814.html :
Between 1979 and 2009, EPI [the Economic Policy Institute] says, U.S. productivity increased by 80 percent [non-annualized], while the hourly wage of the median worker has only gone up by 10.1 percent [non-annualized].
Best, Neil
As per my other post, increasing productivity is often competed away by new entrants-- consider the fate of US Steel, a technological leader in the early 20th century.

Corporate profits as a percentage of GDP have spiked in the last 30 years (reaching the 1920s level) but have been quite cyclical over the whole period.

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Re: 1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat.

Post by Dxbinvestor » Fri Sep 20, 2013 3:12 am

I read an interesting paper once that illusttated Manhattan real estate since the 1700s has grown at exactly the inflation rate. Thus, the returns are only from rents and leverage (e.g. borrowing 50%, inflation is 3%, you make 6%, or 3% real)

Makes sense that stocks would be the same really.. Companies borrow so same concept.

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Re: 1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat.

Post by JoMoney » Fri Sep 20, 2013 5:31 am

nisiprius wrote:... I'd be very curious if other people would try poking around for news or other articles mentioning the pre-1957 S&P index, and what it was called--particularly before Standard merged with Poor's.
Have you seen this? http://cowles.econ.yale.edu/P/cm/m03-2/m03-2-int.pdf

Probably something like: "The Standard Statistics weekly indexes"
lots of interesting comments and index names etc...
"Cowles Commission common-stock indexes"
"Frederick R Macaulay's index"
"Poor's" and "Moody's" Manuals
"New York Times daily average"
"daily Associated Press averages"
"New York Herals Tribune indexes"
"Axe-Houghton" and "Annalist" indexes"

[Edit].. main link http://cowles.econ.yale.edu/P/cm/m03-2/index.htm
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Re: 1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat.

Post by richard » Fri Sep 20, 2013 6:45 am

Valuethinker wrote:As per my other post, increasing productivity is often competed away by new entrants-- consider the fate of US Steel, a technological leader in the early 20th century.

Corporate profits as a percentage of GDP have spiked in the last 30 years (reaching the 1920s level) but have been quite cyclical over the whole period.
The benefits of increased productivity could go to employees, customers, suppliers, taxes, etc. rather than to the company. As you note above regarding dps and eps, there's a limit.

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Re: 1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat.

Post by Valuethinker » Fri Sep 20, 2013 11:15 am

Dxbinvestor wrote:I read an interesting paper once that illusttated Manhattan real estate since the 1700s has grown at exactly the inflation rate. Thus, the returns are only from rents and leverage (e.g. borrowing 50%, inflation is 3%, you make 6%, or 3% real)

Makes sense that stocks would be the same really.. Companies borrow so same concept.
Interesting if true given the vertical takeoff of Manhattan Real Estate since 1976. Friend of a friend, family bought a building in 1978 for more or less as a purchase price the rental income it now pays (as of 2008)- implying a price rise of something like 15X.

You are talking, residential or commercial, something like a 20x rise in Manhattan real estate prices since 1976? Ie a 5-6 fold rise in real terms?

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Re: 1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat.

Post by Dxbinvestor » Fri Sep 20, 2013 6:10 pm

Valuethinker wrote:
Dxbinvestor wrote:I read an interesting paper once that illusttated Manhattan real estate since the 1700s has grown at exactly the inflation rate. Thus, the returns are only from rents and leverage (e.g. borrowing 50%, inflation is 3%, you make 6%, or 3% real)

Makes sense that stocks would be the same really.. Companies borrow so same concept.
Interesting if true given the vertical takeoff of Manhattan Real Estate since 1976. Friend of a friend, family bought a building in 1978 for more or less as a purchase price the rental income it now pays (as of 2008)- implying a price rise of something like 15X.

You are talking, residential or commercial, something like a 20x rise in Manhattan real estate prices since 1976? Ie a 5-6 fold rise in real terms?
The article I read was for commercial.

For residential... You are completely right. I think the luxury inflation rate is much higher than the overall rate. CEOs are paid like 100x more than they were 30 yrs ago..
and since the financial industry took off in the 90s there is a lot of demand for prime Manhattan residential, and very little supply.

There is also a trend for families staying in the city so large apartment and townhouse supply is even more constrained.

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Re: 1874-2004:S&P500 EPS grew anz'd 1.7% pts > than inflat.

Post by Barry Barnitz » Fri Sep 20, 2013 6:35 pm

Hi Nisi:

The forerunner to the S&P were the Cowles Commission indexes compiled by Charles Cowles for his ground breaking 1933 study on investment performance. You can get a link to the Cowles paper in the wiki: Indexing: theory & history - Bogleheads

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