I was on TV the other day next to a guy who goes, totally matter-of-factly: “We should get 8 percent earnings growth for the S&P 500 in 2014 and earnings drive stock market returns so I expect to see an 8ish percent return for the market this year.” My jaw dropped. I don’t even want to tell you how much actual money he manages for people in real life. It’s disturbing.
But only disturbing to me. Everyone else seemed okay with both the forecast and the basis upon which it had been formulated, no questions asked. Maybe I’m the freak. I need to learn to nod my head, I guess. By the way, 8% isn’t very far off of the average annual return for equities, so he may end up being right by accident 😉
So anyway, does earnings growth determine the returns of the stock market?
How about interest rates? Do they drive returns for stocks?
What about inflation? Or GDP growth? Or the rate of the ten-year treasury bond? Or any of the other factors used on a daily basis to predict the markets?
Well? Which one is it? Which one works?
All of them. None of them. Some of them sometimes – but then others of them other times. And usually in all different combinations. Also, they start and stop mattering randomly and with no warning. And then sometimes no combination of any of them is indicative of anything because a president is shot or a war starts or a plane hits a building or a nuclear reactor melts down during an earthquake-caused tsunami on the other side of the world.
In other words, forecasts using any combination of any of these can only ever be nonsense – even if it’s well-meaning nonsense. None of these factors can continually keep an investor on the right side of the stock market, although ignoring them altogether also won’t be able to either.
Ben Carlson is an institutional investor who writes a great new blog called A Wealth of Common Sense. He tries to distill complex topics down into key points of understanding for regular folks and pros who are interested in the truth. I love his stuff. Here he makes the same point with data that I’ve made above with my anecdote:
The following table shows the average dividend yield, company earnings growth and performance of the S&P 500 by decade along with economic growth, inflation, average interest rates and the 10 year treasury returns:
Some observations on this data:
- Add up the average dividend yield and the average earnings growth (8.9%) and you get pretty close to the long-term average annual stock return (9.4%) since 1930.
- Yet stock returns can be feast or famine depending on the decade.
- Dividend yields have come down in recent decades, but much of this stems from a combination of rising markets and share repurchases.
- Rising interest rates don’t necessarily have to be bad for stock returns (50s & 60s)
- There were times when bonds outperformed stocks (30s, 00s).
- There were long periods of negative real bond returns (40s to 70s).
- Bonds didn’t have a single decade of negative nominal returns proving their worth as a stabilizer for the low risk part of your portfolio.
- There were times of subdued inflation (50s-60s & 90s-present) and high inflation (40s, 70s & 80s).
- Stocks lost out to inflation over two different decades (70s & 00s)
- There were times when economic growth outpaced growth in company earnings (30s to 60s, 80s & 00s).
- There were times when company earnings growth outpaced economic growth (70s, 90s, 10s).
- Economic growth was fairly stable from the 1950s to the present time but stock returns were not.
- Stocks lost investors money during two decade long stretches (30s & 00s).
- Companies still paid decent dividends during those periods.
- The 1930s were a pretty terrible decade.
Ben goes on to show that stocks have, in fact, murdered bonds in inflation-adjusted terms going back to the 1920’s at a rate of more than 3-to-1. But it is important to note that this long-term record for the market has been accumulated through a vast array of economic environments – no two are ever exactly the same.
Moreover, even when there are similarities between environments – think of the rapid earnings growth during both the 1970’s and the 1990’s – the end results can be starkly different; the 70’s couldn’t have been worse for stocks while the 90’s couldn’t have been better.
The bottom line is that it’s great to be aware of the current trends and the ability to contextualize them in terms of historic periods is probably not harmful either. So long as you’re not betting big on the predictive power of these metrics. Because it’s not different this time, it’s different every time.
Source:
The Way Way Back of Market Cycles (A Wealth of Common Sense)
خرید vpn
Howdy there! Do you know if they make any plugins to support with Search Motor Optimization? I’m attempting to get my site to rank for some specific keywords but I’m not observing very great outcomes. If you know of any you should share. Appreciate it!
خرید vpn
Great blog! I identified it whilst searching on Yahoo Information. Do you have any suggestions on how to get outlined in Yahoo News? I have been striving for a while but I never look to get there! Thank you
تبلیغات در گوگل
Hi there colleagues, how is all, and what you would like for to say about this post, in my see its really incredible created for me.
خرید کریو
we came across a great website that you just could possibly delight in. Take a appear in situation you want
Immigration Lawyers in London
[…]check beneath, are some entirely unrelated web-sites to ours, on the other hand, they’re most trustworthy sources that we use[…]
Roblox forum
[…]check below, are some entirely unrelated sites to ours, on the other hand, they are most trustworthy sources that we use[…]
Wills and Probate Solicitors in London
[…]Sites of interest we have a link to[…]
پروکسی تلگرام
Do you have a spam difficulty on this site I also am a blogger, and I was curious about your predicament several of us have created some nice procedures and we are hunting to trade techniques with other people, why not shoot me an e-mail if intrigued.
تبلیغات در گوگل
Hey there, I consider your web site may be getting browser compatibility concerns. When I look at your website in Safari, it seems fantastic but when opening in Internet Explorer, it has some overlapping. I just wanted to give you a rapid heads up! Oth…
فیلتر شکن رایگان
It is heading to be finish of mine working day, nonetheless before complete I am reading this great post to improve my experience.
خرید vpn
Howdy there! Do you know if they make any plugins to aid with Look for Motor Optimization? I’m striving to get my website to rank for some targeted keywords and phrases but I’m not observing very great benefits. If you know of any make sure you share.…
خرید کولر صنعتی
we favor to honor lots of other world wide web web-internet sites on the internet, even when they arent linked to us, by linking to them. Underneath are some webpages really really worth examining out
وی پی ان سیسکو
Hiya! Quick question which is completely off subject. Do you know how to make your internet site mobile welcoming? My internet site seems to be weird when viewing from my apple iphone. I’m trying to find a topic or plugin that may well be ready to prop…
best vibrating cock ring
[…]below you will locate the link to some internet sites that we believe you must visit[…]
وی پی ن آیفون
Superb site! I located it even though searching on Yahoo News. Do you have any guidelines on how to get detailed in Yahoo Information? I’ve been trying for a although but I never appear to get there! Thank you