Theoretical question about markets

[QQQShort]

U.S. equity market returns mirror economic and earnings growth, which approximates population growth. Since 1929, we've experienced the following compound real growth rates in the U.S.:

S&P 500 index = ~2%
S&P 500 earnings = ~2%
GDP = ~3%
Population = ~1%

As long as we keep adding people to our planet and productivity does not turn negative, economic growth and market returns should continue to be positive over the long-term.

 

[trader99]

Quote from toddf:

Thanks for your responses, everyone.


In my economy, the combined value of EVERYTHING as measured in dollars was $1 billion. Stocks, real estate, cash, cars, whatever. All of that added up to $1 billion. In this economy, stocks can only be worth $1 billion total at most, and that only happens when everything else is worth $0. I suppose stocks could technically be worth more than $1 billion if people decided that things like real estate had negative value, but that is quite silly.

If the rate of growth of the total value of stocks outpaces the rate of growth of the total supply of money/value, then eventually, the value of stocks becomes higher than the value of everything (including stocks!).


Whether there is inflation or not also doesn't matter. The paradox just takes longer to occur if there's inflation. For example, starting from a total money/value supply of $1 billion and stock value of $100 million with 0 inflation and 10% stock growth rate, it takes 25 years for the paradox to occur (the money/value supply is still $1 billion, but stocks alone are worth $1.08 billion). If inflation is 5% instead of 0%, it takes 50 years instead of 25, but it still happens. After 50 years, the total money/value supply is $11.47 billion, but stocks alone are supposedly worth $11.74 billion).

You got some interesting points. But you need to understand a little clearer how markets work in an economic sense.

The U.S. equities market cap has increased tremendously. It's probably in the several trillions now. Back in the 70s it was in the billions.

But the REST of the world market equities market cap went UP as well. So, proportionally, the US isn't the entire pie. You get it? In fact, as part of the entire pie, our market cap has actually gone down over time. It makes sense. As other fast growing economies develop and catch up, it will create new values which investors will put money into.


Note: Also, this value has not been adjusted for inflation as well.

 

[toddf]

Thanks. I knew there was something fundamentally wrong with my understanding of how these things worked. All of your responses have been very helpful!

 

[Lawrence Chan]

The companies that act as the benchmark 50 years later are not the ones you have today.

The growth rate quoted by most people is just a convenient measure - usually based on, say, Dow Jones Industrial Average, or, S&P 500. Sometimes, they even quote Nasdaq 100; although that happen a lot less nowadays as it looks very bad

Notice DJ30 has only 30 stocks. SP500 has only 500 stocks in it.

These growth rates are not the real growth rate of the stock market as a whole. Many stocks listed are gone forever and you will not find them anywhere as no one talks about them.

Those rates are not even comparable to themselves because the components get changed all the time.

So, taking those figures and use that as a generalized excuse to own any stock - does not make sense.

 

[peilthetraveler]

Dont be fooled.....Remember that the Dow jones changes stocks every once in a while to fool you into thinking that the stock market is out performing inflation...what about the countless many stocks that have gone under during the years? Look at the dow jones in the 1800s and show me what stocks are still listed on it. None. They get replaced by better stocks there for making the illusion that the stock market is outperforming inflation. Remember its a zero sum game. Their is no money made or lost, only what people put on the table. For every stock you show me that made 10% last year...i'll show you a stock that lost 10% You've got 1000s of stocks out there yet people only look at the biggest and the best. Your flaw is that in 100 years you will have maybe 5 to 10 times as many people in the economy making 20 times as much money adjusted for inflation in 100 years.

100 years ago people made 13 dollars a week for 59 hour weeks. Now the average person makes 800 dollars a week for 40 hours weeks. Adjust that and you see you peole are making about 100 times as much money as they did 100 years ago. The Dow jones was around 80 about 100 years ago. Now the dow jones is at 10,000, just about 130 times as much as it was 100 years ago. (there are more stocks on the DJ too that you have to take into consideration) As you can see the game stayed the same only thing that happens is people make more money and the dow goes higher. In 100 years the DJ will probably hit 1 million and the average wage will be 80,000 dollars a week. (i know its sounds insane but imagine telling someone 100 years ago that it would cost 20 bucks for you and a date, roughly 2 weeks wages, for them to go to the movies in 100 years )

Stock market is a zero sum game, For someone to win, someone has to lose. The stock market doesnt outperform anything, only people outperform.