Monday, October 2, 2023

For the last 100 years or so, the U.S. equity market has returned about 9% annually. But that doesn’t mean it will do the same for the next 100 years. Of course, investment fund marketers say history will repeat itself. But I’m not so sure.

Stocks are loosely correlated to corporate earnings, which are loosely correlated to economic growth. Well, World Bank data shows how U.S. economic growth has been gradually slowing over the last century, and I think it will continue. Output is a function of hours, effort, and productivity. In the future, I think people will work fewer hours and may not work as hard.

Part of this is because of the pandemic. Some decided that they now value leisure more than output. There are places in the world where people traditionally value leisure more than output. One is Europe, where stocks have returned basically nothing over the last 15 years.

For a while, U.S. economic growth was about 4%. Then it dropped to 3%. We’ll be lucky to achieve 2% in the future. I think it will be closer to 1% or less. And if we have growth of 1% or less, it’s unlikely stock market returns will be anywhere near 9% annually.

There’s no law saying stocks must return 9% a year if the conditions that were present for the last 100 years are not present for the next 100 years. Also, that 9% return could materialize after a decade or more of negligible returns, as has happened in the past.

From 1929-1945 and 1969-1982, markets went nowhere. We may be entering (or in) one of those periods again.

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