Long-Term Stock Market Expectations

Articles you should read

Jeremy Grantham's 2012 article “My Sister's Pension Assets and Agency Problems” has lots of interesting content, especially the first two pages. He demonstrates that going back to 1882, GDP and stock market fair value both rise very consistently; they are not volatile. Stock market fair value is from Shiller's methodology, using hindsight perfect knowledge of future earnings. Surprisingly, stock market fair value always has stable growth. Stock market price, on the other hand, is very volatile and does not track fair value or GDP. Prices are all over the place, and often above or below fair value for decades at a time! However, there is eventually a reversion to the mean.

Barry Ritholtz posted some similar charts, going back to 1871. He has simply drawn an exponential trend line over the US stock market chart. (On the log-scale, an exponential curve becomes a straight line.) There is no fair value calculation here, but it's a similar overall picture to Grantham's: long-term exponential growth rate is stable. However, stocks can remain above or below the mean (trend line) for very long periods.

There are many important messages that stem from this long-term data.

What this tells us

- Perpetual Bull,