Argument Supporting Strong Future Equity Returns (?)

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Argument Supporting Strong Future Equity Returns (?)

Post by Call_Me_Op » Sun Mar 25, 2018 6:31 am

If one were to forget about the CAPE Ratio and most other tools for predicting future equity returns and look at the US stock market performance over the past 20 years compared to the longer-term (say since 1972) they will find that the CAGR from 1972-2018 was 10.4%, but the CAGR from 1998-2018 (last 20 years) was only 7.4%. If we want to go back further - how about from 1871-2018 - we find that the CAGR over that 147 year period was 9.15%. If I am to believe "reversion to the mean," is this not a reason to believe we may have relatively high equity returns for the next 20 years?

We may be in the late stages of a bull market, but the bigger picture reveals lousy US stock market returns over the past 2 decades.

Of course, one could make the argument that a 20 year window is too short (or too long) but this seems like an interesting exercise anyway.

Perhaps the next 10 years will not be good - as many are saying - but there appears to be reason for optimism longer term.
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Re: Argument Supporting Strong Future Equity Returns (?)

Post by JoMoney » Sun Mar 25, 2018 7:02 am

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by Call_Me_Op » Sun Mar 25, 2018 7:10 am

What's nice about that figure is you can see that we are below the trend line. And you can see that the latest bull market is simply digging us out of a hole produced by the last couple of bear markets.
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Re: Argument Supporting Strong Future Equity Returns (?)

Post by nisiprius » Sun Mar 25, 2018 7:15 am

It's the eternal investing debate. "It did poorly, therefore it will continue to do poorly." "It did poorly, therefore it is likely to do well."

Siegel himself has acknowledged that he knows of no rational explanation of "Siegel's constant." It just is. Throw into that the fact that the data before 1926 are less reliable than the data since then, and the data before 1871 are so flaky as to amount to guesswork--when the source of stock market returns is a publication entitled "The New York Shipping List" it is an indication that the stock market wasn't being intensely scrutinized back then.

Here's my own "mean reversion" observation (everything always depends on the choice of data interval!) In the time period studied by Dimson & al, 1900 to present, the average real return of the US stock market has been 6.5%, compared 4.3% for the rest of the world. I would argue that this is one heck of a departure from the global mean and I would expect mean reversion over the next century... from globalization if nothing else.

Of course, maybe we are going to be treated to strong future global equity returns everywhere.
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Re: Argument Supporting Strong Future Equity Returns (?)

Post by premiumbananas » Sun Mar 25, 2018 7:31 am

Call_Me_Op wrote:
Sun Mar 25, 2018 7:10 am
What's nice about that figure is you can see that we are below the trend line.
We were below the trendline in 2012 (date of figure).

Figure updated would show that we are significantly ABOVE trendline I assume.

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by AlohaJoe » Sun Mar 25, 2018 7:33 am

nisiprius wrote:
Sun Mar 25, 2018 7:15 am
Here's my own "mean reversion" observation (everything always depends on the choice of data interval!) In the time period studied by Dimson & al, 1900 to present, the average real return of the US stock market has been 6.5%, compared 4.3% for the rest of the world. I would argue that this is one heck of a departure from the global mean and I would expect mean reversion over the next century... from globalization if nothing else.
Another way to look at the same data is that if you don't have 2 world wars on your soil then the stock returns are 6.5% and the global average will mean revert up, rather than the US mean reverting down.

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by Call_Me_Op » Sun Mar 25, 2018 7:35 am

premiumbananas wrote:
Sun Mar 25, 2018 7:31 am
Call_Me_Op wrote:
Sun Mar 25, 2018 7:10 am
What's nice about that figure is you can see that we are below the trend line.
We were below the trendline in 2012 (date of figure).

Figure updated would show that we are significantly ABOVE trendline I assume.
I make an error in time - how fallible of me.

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Last edited by Call_Me_Op on Sun Mar 25, 2018 7:52 am, edited 1 time in total.
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Re: Argument Supporting Strong Future Equity Returns (?)

Post by JoMoney » Sun Mar 25, 2018 7:50 am

premiumbananas wrote:
Sun Mar 25, 2018 7:31 am
Call_Me_Op wrote:
Sun Mar 25, 2018 7:10 am
What's nice about that figure is you can see that we are below the trend line.
We were below the trendline in 2012 (date of figure).

Figure updated would show that we are significantly ABOVE trendline I assume.
That assumption may not be correct, here's a Morningstar chart of the inflation adjusted stock chart with the trend lines drawn over it (hyperlinked to the Morningstar if you click on it)
Image
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Re: Argument Supporting Strong Future Equity Returns (?)

Post by lazyday » Sun Mar 25, 2018 8:33 am

Call_Me_Op wrote:
Sun Mar 25, 2018 6:31 am
but the CAGR from 1998-2018 (last 20 years) was only 7.4%
The 20 year return has been poor (4.4% real) because the US market was very expensive 20 years ago.

If in 1998 you made a 30 or 40 year prediction, you should have predicted low returns. If anything, I think the 20 year return has been generous given the starting valuation, and we should expect worse returns for the next 20.

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by dkturner » Sun Mar 25, 2018 8:36 am

nisiprius wrote:
Sun Mar 25, 2018 7:15 am
Here's my own "mean reversion" observation (everything always depends on the choice of data interval!) In the time period studied by Dimson & al, 1900 to present, the average real return of the US stock market has been 6.5%, compared 4.3% for the rest of the world. I would argue that this is one heck of a departure from the global mean and I would expect mean reversion over the next century... from globalization if nothing else.
When looking at historical stock market data I prefer to go with market cycles. Over the last 18 years we have experienced two of the worst bear markets in the last 100 years, each of which were followed by strong snap backs.

For the period 2000-2017 the S&P had annualized nominal returns of only 5.40% (3.26% real). Since we are, likely, in the latter stages of an 8 year bull market it would be reasonable to expect lower returns over the next 5-7 years, which could easily produce a 25 year period of sub 5% nominal equity returns (sub 3% real).

Maybe the reversion to the mean has already been in effect for 18 years? A 25 year period of sub 5% nominal stock returns looks shockingly low when compared to “long-term” stock returns of 7% nominal (4% real).

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by flyingaway » Sun Mar 25, 2018 9:02 am

If the stock market could drop 50% tomorrow, the 10 year return AFTER tomorrow would be fantastic.

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by Kenkat » Sun Mar 25, 2018 9:16 am

A lot of what happens regarding future US stock market returns will depend on what happens to the US economy in the future. Taking an extreme macro view, you could make the argument that the 1600s belonged to Spain, the 1700s France, the 1800s Britain, the 1900s the United States and the 2000s will belong to...who? The United States? China and greater Asian economies? India? The answer to this question will determine much about future returns.

We’ve had a great run in the US, starting from not even on the map world power wise in 1800 to an emerging world power in 1900 to the largest superpower by 2000. So when you draw trend lines from 1800 to now, future returns based on that trend line will very much depend on whether or not we can repeat the growth that occurred 1800-2000.

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by ReformedSpender » Sun Mar 25, 2018 9:31 am

Call_Me_Op wrote:
Sun Mar 25, 2018 7:10 am
What's nice about that figure is you can see that we are below the trend line. And you can see that the latest bull market is simply digging us out of a hole produced by the last couple of bear markets.
As of Jan 2018 we were (quite a bit) above the historic trend line. The Feb/Mar pullback has simply aligned equities with the trend once again
Market history shows that when there's economic blue sky, future returns are low, and when the economy is on the skids, future returns are high. The best fishing is done in the most stormy waters.

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by Call_Me_Op » Sun Mar 25, 2018 9:35 am

ReformedSpender wrote:
Sun Mar 25, 2018 9:31 am
Call_Me_Op wrote:
Sun Mar 25, 2018 7:10 am
What's nice about that figure is you can see that we are below the trend line. And you can see that the latest bull market is simply digging us out of a hole produced by the last couple of bear markets.
As of Jan 2018 we were (quite a bit) above the historic trend line. The Feb/Mar pullback has simply aligned equities with the trend once again
All the more reason to support the notion of "return to the mean."

I already acknowledged that I could not read the end date of that chart.
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Re: Argument Supporting Strong Future Equity Returns (?)

Post by asif408 » Sun Mar 25, 2018 10:18 am

Call_Me_Op wrote:
Sun Mar 25, 2018 6:31 am
If one were to forget about the CAPE Ratio and most other tools for predicting future equity returns and look at the US stock market performance over the past 20 years compared to the longer-term (say since 1972) they will find that the CAGR from 1972-2018 was 10.4%, but the CAGR from 1998-2018 (last 20 years) was only 7.4%. If we want to go back further - how about from 1871-2018 - we find that the CAGR over that 147 year period was 9.15%. If I am to believe "reversion to the mean," is this not a reason to believe we may have relatively high equity returns for the next 20 years?
What you are asking us is to ignore valuation metrics that, while not perfect, at least have some explanatory power, to use a method that as far as I know, has no proven level of explanatory power. You are welcome to do that but I will stick to tools that, while not perfect, do work sometimes, vs something that is completely unproven.

None of the valuations metrics assure poor returns, as nearly all of these returns estimates I've seen have large enough confidence intervals that it is entirely possible to get good equity returns in the US. Just not probable. And with the option nowadays to easily invest in most of the rest of the world, anyone concerned about the US can include the dozens of other countries that might do better.

Another factor you have to consider about how you look at it is that, for example, CAPE went from mid 40s in 2000 to 32 or so today. Many countries hit even higher CAPE ratios in 2000 and have had much worse returns than the US since then, and their CAPE ratios have correspondingly fallen much farther. Maybe the US will continue with a high CAPE for the foreseeable future, maybe not. Maybe countries like Russia, Italy, Spain, and Brazil, whose CAPE ratios exceeded the US at one point last decade, and are now well below the US, will stay permanently lower. Or maybe not.

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by Call_Me_Op » Sun Mar 25, 2018 10:29 am

asif408 wrote:
Sun Mar 25, 2018 10:18 am
Call_Me_Op wrote:
Sun Mar 25, 2018 6:31 am
If one were to forget about the CAPE Ratio and most other tools for predicting future equity returns and look at the US stock market performance over the past 20 years compared to the longer-term (say since 1972) they will find that the CAGR from 1972-2018 was 10.4%, but the CAGR from 1998-2018 (last 20 years) was only 7.4%. If we want to go back further - how about from 1871-2018 - we find that the CAGR over that 147 year period was 9.15%. If I am to believe "reversion to the mean," is this not a reason to believe we may have relatively high equity returns for the next 20 years?
What you are asking us is to ignore valuation metrics that, while not perfect, at least have some explanatory power, to use a method that as far as I know, has no proven level of explanatory power. You are welcome to do that but I will stick to tools that, while not perfect, do work sometimes, vs something that is completely unproven.

None of the valuations metrics assure poor returns, as nearly all of these returns estimates I've seen have large enough confidence intervals that it is entirely possible to get good equity returns in the US. Just not probable. And with the option nowadays to easily invest in most of the rest of the world, anyone concerned about the US can include the dozens of other countries that might do better.

Another factor you have to consider about how you look at it is that, for example, CAPE went from mid 40s in 2000 to 32 or so today. Many countries hit even higher CAPE ratios in 2000 and have had much worse returns than the US since then, and their CAPE ratios have correspondingly fallen much farther. Maybe the US will continue with a high CAPE for the foreseeable future, maybe not. Maybe countries like Russia, Italy, Spain, and Brazil, whose CAPE ratios exceeded the US at one point last decade, and are now well below the US, will stay permanently lower. Or maybe not.
I am not asking anyone to ignore anything. I am simply pointing-out that based upon long-term historical performance of the US stock market, we have under-performed over the past 20 years. You can place zero weight on that fact - but it is still a fact.

I don't know about you, but my AA is based upon the long-term relative performance of the various asset classes, and not on my opinion as to where the market might be heading in the short term.
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Re: Argument Supporting Strong Future Equity Returns (?)

Post by asif408 » Sun Mar 25, 2018 8:22 pm

Call_Me_Op wrote:
Sun Mar 25, 2018 10:29 am
I am not asking anyone to ignore anything.
From your OP:
Call_Me_Op wrote:
Sun Mar 25, 2018 6:31 am
If one were to forget about the CAPE Ratio and most other tools for predicting future equity returns and look at the US stock market performance over the past 20 years compared to the longer-term (say since 1972) they will find that the CAGR from 1972-2018 was 10.4%, but the CAGR from 1998-2018 (last 20 years) was only 7.4%. If we want to go back further - how about from 1871-2018 - we find that the CAGR over that 147 year period was 9.15%. If I am to believe "reversion to the mean," is this not a reason to believe we may have relatively high equity returns for the next 20 years?
I don't know about others, but this statement (particularly the bold, italicized part) I interpret as asking us to ignore valuation metrics such as CAPE, P/E, P/B, etc.
Call_Me_Op wrote:
Sun Mar 25, 2018 10:29 am
I am simply pointing-out that based upon long-term historical performance of the US stock market, we have under-performed over the past 20 years. You can place zero weight on that fact - but it is still a fact.
I agree it is a fact, and you are correct, I place zero weight on that fact in making investment decisions, primarily because there is no evidence that has shown any predictive power in investing.
Call_Me_Op wrote:
Sun Mar 25, 2018 10:29 am
I don't know about you, but my AA is based upon the long-term relative performance of the various asset classes, and not on my opinion as to where the market might be heading in the short term.
I'm not really sure how to respond since you've thrown out a straw man argument. I'll try to provide some actionable item from your post, since that's the primary point of posting around here. That would be not to make any assumptions about future performance based upon trying to use a method that is completely unproven (past 20 years results compared to long term results) but that matches your preconceived view vs. flawed but at least have been shown to be mildly predictive methods or estimating future returns (such as CAPE, P/B, etc). These types of analysis should be done with a high level of emotional detachment, which is difficult. That is all.

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by lazyday » Mon Mar 26, 2018 1:56 am

In some ways, if something underperforms for some years, then it is likely to outperform in the near future. For example, if over the last 3 years a stock had worse return than the average stock did, then it is likely to have above average return over the next year, as I recall. This also has worked when comparing asset classes to each other. You could look up serial autocorrelation, or long term reversals in cross sectional momentum. Time series momentum also seems to have long term reversals.

How about when an asset such as US equity has underperformed compared to its own long term history? It’s been awhile since I’ve read Jeremy Siegel’s book, but I’m guessing that depending on your assumptions, in the past when the US market has performed worse for some years than its then historical average performance, it has statistically been likely to then outperform the old average for some time period.

If I walked out of a time machine in some random unknown year, and the only thing I knew was that the US market had a 20 year return below its historical mean return, then yes, I would guess that in the next 10 year period it would have above average returns.

But if I knew more, I would probably weight that signal lower than some others, especially valuations.

For example, if a market becomes extraordinarily expensive and you pay a fortune for each dollar of earnings, then of course your future returns will be low. If CAPE is 95 (like it was in Japan around Jan 90 or Dec 89) then even if CAPE doesn’t fall, how much could you possibly expect to make in 10 years, if your investment has almost no earnings? Stocks are just partial ownership in companies, and your companies earn very little relative to what you paid.

If CAPE then does fall from 95 to, let’s say 70 then with caPe falling, P has probably not done well. So as CAPE fell, the stock market has probably not done well. But if you are still paying 70x the 10 year earnings, you also probably won’t do well in the future, even though the market has underperformed its own historical return.

This isn’t as extreme in the US with CAPE at 32 today and 36 20 years ago, but I still would guess that the high valuation story overwhelms the poor returns story. “The last 20 years return is poor because 20 years ago CAPE was high, and the next 10 will be poor because of high CAPE today” makes much more sense than “The next 10 year return will be high because of the poor return of the last 20, ignoring why those returns were low”.

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by Valuethinker » Mon Mar 26, 2018 3:02 am

The problem is the start point.

20 years is almost to the peak of the 2000 bubble-- but not quite.

I would put it that stocks had a torrid 10 year period (to March 2009) and then an amazing almost 10 year period (since then).

I don't know how far back you have to go in the 1990s to be on a breakeven with the market say August 1 2008 (or Nov 2007 when it peaked)? On a total return basis not so bad, but on a price basis quite a long way back into the 1990s I believe.

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by Call_Me_Op » Mon Mar 26, 2018 6:34 am

asif408 wrote:
Sun Mar 25, 2018 8:22 pm
Call_Me_Op wrote:
Sun Mar 25, 2018 10:29 am
I am simply pointing-out that based upon long-term historical performance of the US stock market, we have under-performed over the past 20 years. You can place zero weight on that fact - but it is still a fact.

I agree it is a fact, and you are correct, I place zero weight on that fact in making investment decisions, primarily because there is no evidence that has shown any predictive power in investing.
I disagree. The past performance of asset classes is very relevant - especially on a relative basis. In fact, I believe the only rational way to design a portfolio is to consider that past relative performance of asset classes. I do agree that absolute performance is of less value - but not zero.
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Re: Argument Supporting Strong Future Equity Returns (?)

Post by JoMoney » Mon Mar 26, 2018 6:47 am

Jeremy Siegel’s Predictions for 2018
https://www.advisorperspectives.com/art ... s-for-2018
... Going back to 215 years to 1802, Siegel showed the degree to which stocks have outperformed bonds, bills, gold and the dollar itself. “Over the long run it is the most stable asset,” he said. “It’s not really a random walk. It is mean reversion.

He said that stocks have returned 6.8% annually on a real basis, implying that they double every 10 years. Those returns have been very constant, he said, even over various sub-periods. ...
Jeremy Siegel in Stocks For The Long Run wrote:... The long-term stability of stock returns has persisted despite the dramatic changes that have taken place in our society during the last two centuries ... Yet despite mammoth changes in the basic factors generating wealth for shareholders, equity returns have shown an astounding stability. But stability in the long-run returns of stocks in no way guarantees stability in the short-run ...
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Re: Argument Supporting Strong Future Equity Returns (?)

Post by packer16 » Mon Mar 26, 2018 8:31 am

I think one thing folks need to keep in mind is what mean are folks talking about & what factors effect that mean. If you are talking about world stock market returns, then you are talking about an combination of individual country returns. Each countries returns are going to vary depending upon how each countries system works. In countries that have a strong set of shareholder return values the returns should be higher because the shareholders are going to get a larger piece of the country's output pie than in those that have a more collectivist approaches to the market/competition. So the highest return countries since 1900 share a common set of shareholder friendly outlooks on markets.

The question going forward is this going to change? If countries share more of the output pie with shareholders (like the recent tax cuts in the US do), then the returns to shareholders will be greater. If they increase taxes, nationalize or favor state enterprises for non economic reasons, then shareholder returns go down. IMO it depends upon your views on how the US & the rest of the world will treat minority shareholders versus the current situation. IMO the US should be priced higher than the rest of the world due to better than average treatment of minority shareholders than in the rest of the world.

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by asif408 » Mon Mar 26, 2018 9:11 am

Call_Me_Op wrote:
Mon Mar 26, 2018 6:34 am
asif408 wrote:
Sun Mar 25, 2018 8:22 pm
Call_Me_Op wrote:
Sun Mar 25, 2018 10:29 am
I am simply pointing-out that based upon long-term historical performance of the US stock market, we have under-performed over the past 20 years. You can place zero weight on that fact - but it is still a fact.

I agree it is a fact, and you are correct, I place zero weight on that fact in making investment decisions, primarily because there is no evidence that has shown any predictive power in investing.
I disagree. The past performance of asset classes is very relevant - especially on a relative basis. In fact, I believe the only rational way to design a portfolio is to consider that past relative performance of asset classes. I do agree that absolute performance is of less value - but not zero.
Right, but not focusing on the past 20 years.

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by Call_Me_Op » Mon Mar 26, 2018 9:27 am

asif408 wrote:
Mon Mar 26, 2018 9:11 am
Call_Me_Op wrote:
Mon Mar 26, 2018 6:34 am
asif408 wrote:
Sun Mar 25, 2018 8:22 pm
Call_Me_Op wrote:
Sun Mar 25, 2018 10:29 am
I am simply pointing-out that based upon long-term historical performance of the US stock market, we have under-performed over the past 20 years. You can place zero weight on that fact - but it is still a fact.

I agree it is a fact, and you are correct, I place zero weight on that fact in making investment decisions, primarily because there is no evidence that has shown any predictive power in investing.
I disagree. The past performance of asset classes is very relevant - especially on a relative basis. In fact, I believe the only rational way to design a portfolio is to consider that past relative performance of asset classes. I do agree that absolute performance is of less value - but not zero.
Right, but not focusing on the past 20 years.
Longer time periods are more relevant but still support the point that the relatively recent past (20 years or even 30 years) has not been particularly spectacular. Performance over the past 30 years is in-line with very long-term data.
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Re: Argument Supporting Strong Future Equity Returns (?)

Post by HomerJ » Mon Mar 26, 2018 9:57 am

nisiprius wrote:
Sun Mar 25, 2018 7:15 am
Here's my own "mean reversion" observation (everything always depends on the choice of data interval!) In the time period studied by Dimson & al, 1900 to present, the average real return of the US stock market has been 6.5%, compared 4.3% for the rest of the world. I would argue that this is one heck of a departure from the global mean and I would expect mean reversion over the next century... from globalization if nothing else.
Comparing the U.S. to the rest of the world and including the years 1900-1955 is rather silly.

Of course our numbers were higher because our country wasn't bombed into rubble and/or occupied by foreign invaders and/or government overthrown, etc. Multiple times for some of those countries, I might add.

I would expect other countries to move UP to our historical numbers, not us down to their historical numbers. But I could be wrong of course.
Of course, maybe we are going to be treated to strong future global equity returns everywhere.
Exactly. Why is this less plausible than the other way?

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by iceport » Mon Mar 26, 2018 10:54 am

HomerJ wrote:
Mon Mar 26, 2018 9:57 am
I would expect other countries to move UP to our historical numbers, not us down to their historical numbers. But I could be wrong of course.
The essay linked in this thread would suggest otherwise.

The Paradox of Wealth
Financial Analysts Journal wrote:
Summary

A recent FAJ article by Laurence Siegel painted a sunny picture of the world’s economic and environmental future. Although the author agrees with Siegel’s analysis, his optimism does not extend to security returns; both theory and long-run empirical data support the notion that economic growth lowers security returns by reducing impatience for consumption and altering the supply–demand dynamics of capital—the price of living in an increasingly prosperous, safe, healthy, and intellectually gratifying world.
"Discipline matters more than allocation.” ─William Bernstein

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by HomerJ » Mon Mar 26, 2018 11:36 pm

iceport wrote:
Mon Mar 26, 2018 10:54 am
HomerJ wrote:
Mon Mar 26, 2018 9:57 am
I would expect other countries to move UP to our historical numbers, not us down to their historical numbers. But I could be wrong of course.
The essay linked in this thread would suggest otherwise.

The Paradox of Wealth
Financial Analysts Journal wrote:
Summary

A recent FAJ article by Laurence Siegel painted a sunny picture of the world’s economic and environmental future. Although the author agrees with Siegel’s analysis, his optimism does not extend to security returns; both theory and long-run empirical data support the notion that economic growth lowers security returns by reducing impatience for consumption and altering the supply–demand dynamics of capital—the price of living in an increasingly prosperous, safe, healthy, and intellectually gratifying world.
Weird, since the U.S. was more prosperous, safe, and healthy during the past century and returns were higher than everyone else.

But where people were being invaded and killed every 30 years or so, and some governments were overthrown, returns were low. Strange, eh? You'd think those more risky places would have had higher returns, right?

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Re: Argument Supporting Strong Future Equity Returns (?)

Post by Noobvestor » Tue Mar 27, 2018 2:33 am

HomerJ wrote:
Mon Mar 26, 2018 11:36 pm
iceport wrote:
Mon Mar 26, 2018 10:54 am
HomerJ wrote:
Mon Mar 26, 2018 9:57 am
I would expect other countries to move UP to our historical numbers, not us down to their historical numbers. But I could be wrong of course.
The essay linked in this thread would suggest otherwise.

The Paradox of Wealth
Financial Analysts Journal wrote:
Summary

A recent FAJ article by Laurence Siegel painted a sunny picture of the world’s economic and environmental future. Although the author agrees with Siegel’s analysis, his optimism does not extend to security returns; both theory and long-run empirical data support the notion that economic growth lowers security returns by reducing impatience for consumption and altering the supply–demand dynamics of capital—the price of living in an increasingly prosperous, safe, healthy, and intellectually gratifying world.
Weird, since the U.S. was more prosperous, safe, and healthy during the past century and returns were higher than everyone else.
I'm no expert, but South Africa had real some troubles over the last century. Weird, since they had higher stock returns than the U.S.?
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

david1082b
Posts: 368
Joined: Fri Jun 09, 2017 12:35 pm

Re: Argument Supporting Strong Future Equity Returns (?)

Post by david1082b » Tue Mar 27, 2018 3:35 am

Noobvestor wrote:
Tue Mar 27, 2018 2:33 am
HomerJ wrote:
Mon Mar 26, 2018 11:36 pm
iceport wrote:
Mon Mar 26, 2018 10:54 am
HomerJ wrote:
Mon Mar 26, 2018 9:57 am
I would expect other countries to move UP to our historical numbers, not us down to their historical numbers. But I could be wrong of course.
The essay linked in this thread would suggest otherwise.

The Paradox of Wealth
Financial Analysts Journal wrote:
Summary

A recent FAJ article by Laurence Siegel painted a sunny picture of the world’s economic and environmental future. Although the author agrees with Siegel’s analysis, his optimism does not extend to security returns; both theory and long-run empirical data support the notion that economic growth lowers security returns by reducing impatience for consumption and altering the supply–demand dynamics of capital—the price of living in an increasingly prosperous, safe, healthy, and intellectually gratifying world.
Weird, since the U.S. was more prosperous, safe, and healthy during the past century and returns were higher than everyone else.
I'm no expert, but South Africa had real some troubles over the last century. Weird, since they had higher stock returns than the U.S.?
SA's political issues were perhaps not disruptive in ways that other nations suffered. USA had its own political issues in the 1960s but the markets weren't too affected. SAfrica avoided antimarket revolutions and avoided war destruction, two things associated with poor returns. Why did they get even better returns? One idea is that it started from a rather small population and had huge natural resources to exploit relative to the population size.

Australia also supposedly got slightly better returns than USA from 1900 to 2015 according to CS Yearbooks. It had a similar story to SAfrica perhaps.

JBTX
Posts: 3599
Joined: Wed Jul 26, 2017 12:46 pm

Re: Argument Supporting Strong Future Equity Returns (?)

Post by JBTX » Tue Mar 27, 2018 7:46 pm

Call_Me_Op wrote:
Sun Mar 25, 2018 6:31 am
If one were to forget about the CAPE Ratio and most other tools for predicting future equity returns and look at the US stock market performance over the past 20 years compared to the longer-term (say since 1972) they will find that the CAGR from 1972-2018 was 10.4%, but the CAGR from 1998-2018 (last 20 years) was only 7.4%. If we want to go back further - how about from 1871-2018 - we find that the CAGR over that 147 year period was 9.15%. If I am to believe "reversion to the mean," is this not a reason to believe we may have relatively high equity returns for the next 20 years?

We may be in the late stages of a bull market, but the bigger picture reveals lousy US stock market returns over the past 2 decades.

Of course, one could make the argument that a 20 year window is too short (or too long) but this seems like an interesting exercise anyway.

Perhaps the next 10 years will not be good - as many are saying - but there appears to be reason for optimism longer term.
Let’s take 98-18. You are going from a near high to another market high, and got 7.4%. Doesn’t it stand to reason that since we are at a near market cap and historically high CAPE that the next 20 years would be closer to the 7.4% vs the long term average, and that is only if in 2038 we are at another record high. If the markets mean revert somewhere along the way we may be looking at mid single digits.

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