Author Topic: GDP growth and equity returns  (Read 1272 times)

COguy

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GDP growth and equity returns
« on: March 11, 2013, 02:08:43 PM »
I noticed on the Doom and Gloom?  thread that there is a discussion that assumes low GDP growth going forward makes for guaranteed lower equity returns.  I was reading the GMO site earlier and they had this paper posted on where equity returns come from and how they relate to GDP growth.

https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIBopZakKqLplkSPu6PWy8IYlWZlF9wGOhpH4u6Bb7ac58I5rkIUY44faaFdF9aOsz5%2bGC%2bmcvNRJz5yCAhRZUlL1OiylntYmwB668XC3MDYjtWyadqxrBdVChyBBvdvpD4%3d

Does anybody more economically educated than myself see any holes in their logic?

smedleyb

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Re: GDP growth and equity returns
« Reply #1 on: March 11, 2013, 02:35:32 PM »
I noticed on the Doom and Gloom?  thread that there is a discussion that assumes low GDP growth going forward makes for guaranteed lower equity returns.  I was reading the GMO site earlier and they had this paper posted on where equity returns come from and how they relate to GDP growth.

https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIBopZakKqLplkSPu6PWy8IYlWZlF9wGOhpH4u6Bb7ac58I5rkIUY44faaFdF9aOsz5%2bGC%2bmcvNRJz5yCAhRZUlL1OiylntYmwB668XC3MDYjtWyadqxrBdVChyBBvdvpD4%3d

Does anybody more economically educated than myself see any holes in their logic?

The internet bubble of 2000 was the worst point of overvaluation for the S&P 500 in its history. Having averaged
16 times cyclically adjusted earnings since 1881, the market soared to 44 times, well over twice normal levels. The
losses and forgone returns since then have caused many investors to question whether the long-term history of equity
returns is relevant any more. While this is an understandable reaction, it is the wrong one. The last 12 years have
been part of an essential healing process for U.S. equities, and have brought valuations down from 44 times normal
earnings to 21 times. As we analyze equity returns, this means the healing process is not yet done, and the U.S. equity
market is likely to continue disappointing investors for a few years longer


Sounds about right to me.