Source of U.S. Stock Market Returns, 1952-2018

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SimpleGift
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Source of U.S. Stock Market Returns, 1952-2018

Post by SimpleGift » Tue Aug 13, 2019 4:21 pm

Ever wonder what's been driving U.S. stock market returns in the past several decades? A recent paper has endeavored to decompose the sources of returns between economic growth, favorable financial conditions (like lower interest rates or taxes), changes in investor sentiment, and changes in shareholders' share of potential profits.

What they found was that, from 1952-1988, economic growth was responsible for nearly all of U.S. stock market returns, at 92% (table below). For the subsequent 1989-2018 period, economic growth only accounted for 24%, while the increase in shareholders' share of potential profits was responsible for 54%. In short, rather than reinvesting cash flow into their businesses, either in job-creating projects or employee compensation, companies retained this cash or expended it as dividends and share repurchases.
None of this should be too surprising for investors, but it's interesting to see an estimate of the numbers over time. One implication is that, for future stock market returns to keep pace with that of recent decades, the share of U.S. economic growth captured by shareholders needs to keep on expanding. Somehow this doesn't seem terribly likely.

Thoughts?

PS. Additional commentary on this study can be found here at Retirement Income Journal and here at Barrons.
Last edited by SimpleGift on Tue Aug 13, 2019 6:11 pm, edited 1 time in total.

lazyday
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Re: Source of U.S. Stock Market Returns, 1952-2018

Post by lazyday » Tue Aug 13, 2019 5:23 pm

SimpleGift wrote:
Tue Aug 13, 2019 4:21 pm
In short, rather than reinvesting their cash flow into their businesses, either in job-creating projects or employee compensation, companies retained this cash or expended it as dividends and share repurchases.
Maybe just a nitpick here: from a quick read of the conclusions, I have the impression that "Change in Shareholder Share of Potential Profits" is about how much flows to capital (shareholders) vs labor. It seems to me that reinvesting into the business should be considered part of the share going to shareholders instead of labor.

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SimpleGift
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Re: Source of U.S. Stock Market Returns, 1952-2018

Post by SimpleGift » Tue Aug 13, 2019 5:48 pm

^^^ To be honest, the details of the whole "labor vs. capital" issue in how the study authors constructed their models is something I was hoping to avoid in this thread, as it's likely to quickly devolve into politics. It's certainly a legitimate question for discussion, but perhaps just not here on the Bogleheads Forum.

Probably "the widening chasm between the stock market and the broader economy" is about as far I feel comfortable going in safely discussing these issues here. :wink:

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LikeYouImagine
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Re: Source of U.S. Stock Market Returns, 1952-2018

Post by LikeYouImagine » Wed Aug 14, 2019 4:10 pm

Bridgewater has a similar piece they have published earlier this year.

https://www.bridgewater.com/research-li ... rspective/

PluckyDucky
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Re: Source of U.S. Stock Market Returns, 1952-2018

Post by PluckyDucky » Wed Aug 14, 2019 4:28 pm

The rise of mutual funds and 401ks didn't have anything to do it?

People aren't keeping money under the mattress anymore.

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Re: Source of U.S. Stock Market Returns, 1952-2018

Post by TropikThunder » Wed Aug 14, 2019 5:47 pm

PluckyDucky wrote:
Wed Aug 14, 2019 4:28 pm
The rise of mutual funds and 401ks didn't have anything to do it?

People aren't keeping money under the mattress anymore.
Maybe that's included in "Changes in Investor Sentiment".

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Re: Source of U.S. Stock Market Returns, 1952-2018

Post by petulant » Wed Aug 14, 2019 5:52 pm

SimpleGift wrote:
Tue Aug 13, 2019 5:48 pm
^^^ To be honest, the details of the whole "labor vs. capital" issue in how the study authors constructed their models is something I was hoping to avoid in this thread, as it's likely to quickly devolve into politics. It's certainly a legitimate question for discussion, but perhaps just not here on the Bogleheads Forum.

Probably "the widening chasm between the stock market and the broader economy" is about as far I feel comfortable going in safely discussing these issues here. :wink:
I wonder how the transition from defined benefit to defined contribution plans affected it. If pension expenses have fallen but many investors became more direct shareholders, is it possible (if unlikely) that the average worker has a similar amount of economic wealth with a completely different measure of labor vs shareholder value?

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Re: Source of U.S. Stock Market Returns, 1952-2018

Post by SimpleGift » Wed Aug 14, 2019 6:33 pm

petulant wrote:
Wed Aug 14, 2019 5:52 pm
If pension expenses have fallen but many investors became more direct shareholders, is it possible (if unlikely) that the average worker has a similar amount of economic wealth with a completely different measure of labor vs shareholder value?
Interesting question. But according to the paper, even though millions of Americans have been investing in workplace retirement plans for 30 years, there's apparently still not much overlap between workers and investors:
Greenwald et. al. wrote:Only about half of households report owning stocks either directly or indirectly in 2016. Even among those households that own equity, most own very little: the top 5% of the stock wealth distribution [equity owners] owns 76% of the stock market value and earns a relatively small fraction of income as labor compensation.
Boglehead investors, of course, might be expected to show more overlap than the average worker!

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Re: Source of U.S. Stock Market Returns, 1952-2018

Post by garlandwhizzer » Wed Aug 14, 2019 7:20 pm

SimpleGift wrote:

One implication is that, for future stock market returns to keep pace with that of recent decades, the share of U.S. economic growth captured by shareholders needs to keep on expanding. Somehow this doesn't seem terribly likely.

Thoughts?

I agree that this doesn't seem likely to persist. The opposite may happen going forward. Exuberant equity markets in the US have in the past couple of decades been largely driven by factors other than robust economic growth. In earlier eras in spite of much higher personal and corporate tax rates plus much higher interest rates and inflation rates, plus much lower levels of technology, the economy boomed and carried equity markets along with it. In recent years we have resorted to a series of repeated tax cuts, both personal and corporate, incredibly low interest rates, QE, and massive corporate stock buybacks in order to prop up our equity markets and the economy. All this has produced only modest (US) to zero (EU, Japan) real economic growth which has seemed largely resistant to ultra-aggressive monetary policy. How long can factors apart from underlying economic strength continue to drive market returns? We're going to find out. This may be a reason why many "experts" have suggested that forward returns will be significantly lower than historical norms. We have enjoyed a great 10+ year bull market in stocks, bonds, real estate, and collectables. I hope all of us were along for that wonderful ride. I believe it's unlikely that the next ten years will be as kind to us as the last ten.

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Re: Source of U.S. Stock Market Returns, 1952-2018

Post by Valuethinker » Thu Aug 15, 2019 5:28 am

SimpleGift wrote:
Wed Aug 14, 2019 6:33 pm
petulant wrote:
Wed Aug 14, 2019 5:52 pm
If pension expenses have fallen but many investors became more direct shareholders, is it possible (if unlikely) that the average worker has a similar amount of economic wealth with a completely different measure of labor vs shareholder value?
Interesting question. But according to the paper, even though millions of Americans have been investing in workplace retirement plans for 30 years, there's apparently still not much overlap between workers and investors:
Greenwald et. al. wrote:Only about half of households report owning stocks either directly or indirectly in 2016. Even among those households that own equity, most own very little: the top 5% of the stock wealth distribution [equity owners] owns 76% of the stock market value and earns a relatively small fraction of income as labor compensation.
Boglehead investors, of course, might be expected to show more overlap than the average worker!
I wonder if stock-related employee compensation is included in those numbers?

Particularly in the tech sector, I believe, stock/ restricted stock units, are a significant part of compensation at most levels of the company. Those people are de facto investing in the stock of their employer.

(this all may a perfect example of the metropolitan bubble, that it is only a small percentage of employees, but includes all the people I know who work for American tech companies ...)

petulant
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Re: Source of U.S. Stock Market Returns, 1952-2018

Post by petulant » Thu Aug 15, 2019 6:57 am

SimpleGift wrote:
Wed Aug 14, 2019 6:33 pm
petulant wrote:
Wed Aug 14, 2019 5:52 pm
If pension expenses have fallen but many investors became more direct shareholders, is it possible (if unlikely) that the average worker has a similar amount of economic wealth with a completely different measure of labor vs shareholder value?
Interesting question. But according to the paper, even though millions of Americans have been investing in workplace retirement plans for 30 years, there's apparently still not much overlap between workers and investors:
Greenwald et. al. wrote:Only about half of households report owning stocks either directly or indirectly in 2016. Even among those households that own equity, most own very little: the top 5% of the stock wealth distribution [equity owners] owns 76% of the stock market value and earns a relatively small fraction of income as labor compensation.
Boglehead investors, of course, might be expected to show more overlap than the average worker!
Yeah, like I said, it is unlikely that the economic wealth received is the same. But I'm not sure the statistics about wealth concentration show that (though they may affect our intuitions)--it may not be significant that the top 5% own 76% of the stock market value or that half of households don't own stocks. For example, it could be that pension fund assets before 1980 were a small enough part of overall wealth that the top 5% still owned most stock market value, and it may be that even in the early age of higher union membership that a large number of workers were working for smaller/non-union employers without pensions so that less than half of households were really covered by pensions. You know, not trying to argue or anything, just being clear about what the numbers say and don't say.

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Re: Source of U.S. Stock Market Returns, 1952-2018

Post by Top99% » Thu Aug 15, 2019 8:07 am

SimpleGift wrote:
Tue Aug 13, 2019 5:48 pm
^^^ To be honest, the details of the whole "labor vs. capital" issue in how the study authors constructed their models is something I was hoping to avoid in this thread, as it's likely to quickly devolve into politics. It's certainly a legitimate question for discussion, but perhaps just not here on the Bogleheads Forum.

Probably "the widening chasm between the stock market and the broader economy" is about as far I feel comfortable going in safely discussing these issues here. :wink:
The Bridgewater article linked by LikeYouImagine (a good read BTW) goes there for you :wink: :wink:. All this brings to mind one of my favorite quotes: "If something can't continue it will stop." It does seem like several of the tail wind factors for profit margins will slow down or cease and some may become head winds.
Adapt or perish

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