Pension recovery performance 2020

AnotherJoe

itwasntme001 said:

For all we know we could be in a giant stock market bubble and once interest rates and inflation "normalize" to 3, 4, 5, 6, 7%, you'll get a repricing of financial markets on such a massive scale that will be seen as the bubble bursting.

Uk equities are probably better positioned to handle this environment than S&P500 and certainly the Nasdaq.

That;s why I say, you got to be a market timer to generate significant wealth long term.  Even a pure passive tracker can easily have a 20 year period of negative returns.

Something like capital gearing trust, who agree market timing works and admit to doing so, has provided the best returns out of all ITs.  Medium to long term market timing seems to work well.  The power of compounding works just as well (perhaps even better) when avoiding large draw-downs.

Only if you pick your index very specifically, maybe Japan for example, or "horse feed suppliers 1910-1930", or "companies that only make black and white TVs, 1980-2000"

I doubt there's been a period when a global tracker would have returned negative returns for 20 years on the trot.

Another_Saver

Deleted_User said:

Another_Saver said:

Another UK example, the FTSE 100's opening market cap in December 1985 was £164bn, at the end of 2019 it was £1,888.878bn. A CAGR of 7.45%, whereas the index grew 5.05% almost the same as GDP. Apologies I overstated dilution as ~2.4% earlier, this works out at 2.23%.

1. You did not provide a reference.
2. When you say “the index grew 5.5%”, are you quoting total return including inflation ? Total return includes dividend reinvestment and compounding. That’s what you need to use to compare like with like (or almost like with like).  In a perfect world you would be comparing total stock market return in real  terms to real GDP growth.

https://www.telegraph.co.uk/finance/markets/ftse100/10544527/FTSE-100-celebrates-30th-birthday.html

Recent mkt cap data from FTSE Russell factsheets Archive (oldest currently available is 31/1/20, I have a copy of the 31/12/19 one saved, you could substitute the 31/1/20 one or work backwards approximating the mkt cap)
GDP from ONS - have to use current market prices GDP. I use full calendar year GDP, and the stock market index at the end of that year. There is an argument you could use start year or mid year prices or the average of the start and end.

5.05% is the FTSE 100s index nominal CAGR without dividends from 31/12/85-31/12/19.
I have done these calculations properly on my PC but currently on phone so may have miscalculated.
You cannot compare the total return with GDP, I have never said that, I have only been talking about index price. Dividends are like income. I am talking about growth.

itwasntme001

AnotherJoe said:

itwasntme001 said:

For all we know we could be in a giant stock market bubble and once interest rates and inflation "normalize" to 3, 4, 5, 6, 7%, you'll get a repricing of financial markets on such a massive scale that will be seen as the bubble bursting.

Uk equities are probably better positioned to handle this environment than S&P500 and certainly the Nasdaq.

That;s why I say, you got to be a market timer to generate significant wealth long term.  Even a pure passive tracker can easily have a 20 year period of negative returns.

Something like capital gearing trust, who agree market timing works and admit to doing so, has provided the best returns out of all ITs.  Medium to long term market timing seems to work well.  The power of compounding works just as well (perhaps even better) when avoiding large draw-downs.

Only if you pick your index very specifically, maybe Japan for example, or "horse feed suppliers 1910-1930", or "companies that only make black and white TVs, 1980-2000"

I doubt there's been a period when a global tracker would have returned negative returns for 20 years on the trot.

1900-1920 had a real negative period in world equities.  So whilst a negative 20 year period has not happened for quite sometime, it has happened.  That's not to say it it won't happen though.  Of course no one knows.

It would be interesting to see global GDP vs global market cap for equities over as far back as possible.  There are limits to how much of GDP's share goes to the capital holders and how much for the rest.  Perhaps 1900 saw the peak in stock holders share in GDP?  I think we may be at one now globally (certainly we are for US)?

itwasntme001

Thrugelmir said:

itwasntme001 said:

Thrugelmir said:

itwasntme001 said:

For all we know we could be in a giant stock market bubble and once interest rates and inflation "normalize" to 3, 4, 5, 6, 7%, you'll get a repricing of financial markets on such a massive scale that will be seen as the bubble bursting.

A business can only generate what it generates. At some point the price paid for a share of a business has to revert to the mean. Markets are often irrational for long periods. 

And valuations depend on interest rates, earnings depend on pricing power (which becomes more important during inflationary periods) etc.

Earnings can manipulated.  Share buybacks being the prime example of how Executives reward themselves.  

Yeh front loading of returns is one way to boost bonus packages.  Once they have run off with the money, perhaps the bag-holders will be the equity holders?

Technically that's not earnings manipulation.  Earnings are what they are.  All it is is a way to boost EPS, nothing more than that.

[Deleted User]

You cannot compare the total return with GDP, I have never said that, I have only been talking about index price. Dividends are like income. I am talking about growth.

Still no correlation and your statement re 2% lag behind GDP is still wrong.  Dividends depend on taxation systems - among other factors.  That’s why US has low dividends.  Total return has a meaning.  Profit has a meaning.  Index growth net of dividends is a not a particularly meaningful number when comparing to GDP growth. 

Thrugelmir

Revenue equates to GDP.  GDP is not a measurement of profit or cash. More a broader indication of economic growth or contraction.  If GDP is contracting then overall profitability of companies will correspondingly fall.  The cake can only be sliced so many ways. 

itwasntme001

Thrugelmir said:

Revenue equates to GDP.  GDP is not a measurement of profit or cash. More a broader indication of economic growth or contraction.  If GDP is contracting then overall profitability of companies will correspondingly fall.  The cake can only be sliced so many ways. 

You have just contradicted yourself.

Another_Saver

Deleted_User said: 

Another_Saver said:

Deleted_User said:

Another_Saver said:

Deleted_User said:

Another_Saver said:

Deleted_User said:

“ most national stock market indices lag their country's GDP by about 2% a year...”

Source? I find this very surprising.  Have not seen anything like this in practice.  Stock markets are weakly correlated to GDP for several reasons. And generally they have outperformed anaemic GDP growth in the developed world. 

I didn't say correlated.
Markets are a human system, to suggest they are so efficient that to try and do something else is silly... Well I think that's a silly idea.
I have explained how even over the recent long term, uprating (or positive speculative return) and listed companies expanding the share of GDP they occupy have cancelled out this effect. Neither of those should be relied on indefinitely.

Source: https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.researchaffiliates.com/documents/FAJ-2003-Two-Percent-Dilution.pdf&ved=2ahUKEwiLz4Dz_bbtAhUOfMAKHe7kBDUQFjAAegQIAhAB&usg=AOvVaw3k73yZYUiPErU7pmTxLLQD

At the level of a sufficiently broad and large national index, stock returns are a function of:
Dividend yield and capital growth

Capital growth is a function of:
Inflation/change in price level

Population growth

Capital dilution/concentration

Change in valuation/rerating/

Stock market share of GDP expansion/contraction

Real productivity growth (real GDP per capita growth)

Unfortunately the UK has been tending towards an extreme example like Hong Kong or Singapore of a stock market that has close to nothing to do with the economy it is in. The FTSE 100s biggest mining company Rio Tinto for example pay most of their tax in Australia, have essentially negligible operations in the UK, I would guess that a very small amount of their sales, directly or indirectly are to the UK, and I suspect they are more than the UK average 55% foreign-owned.
However this is true, to varying degrees, of almost every company and every stock market in our globalised, internationally trading world.

Same thing. The reference does not claim that the index lags GDP growth by 2%, so it does not support your assertion. The reference talks about earnings growth.  That’s not what the index returns.  Firstly, a large chunk of the economy is not traded on the stock market and is not reflected in the index.  Secondly, earnings to price ratio has been going down for a looong time now.  Thirdly, the paper is dated.  It talks about a 100 year period and chooses to discount a decade.  Well, we are 20 years later. That’s 30 years’ worth of extra data vs the 90 year period they considered.   Over the recent decades buybacks in the US have outpaced share emission. The paper is dated on this issue as well.  

In reality, returns on major country indices have outpaced GDP growth over sufficiently long periods of time.  That’s a fact.  Does not matter what papers say - and they don’t actually say that indices return less than the GDP growth.
If you include dividends then of course the total return on almost all national stock indices will outpace that economies GDP growth. The actual indices have lagged GDP over the very long term. That is a fact. I don't know where you have gotten yours from or how you explain yours. The reasons matter, how the markers work matters. They do actually say that as I explain further below.

This reference plots S&P 500 return vs GDP growth. https://www.bloomberg.com/opinion/articles/2020-06-09/stock-market-has-almost-always-ignored-the-economy

Yes it does, again I have never said anything about correlation.
The paper answers all of your points.
A stock market index's growth cannot exceed the dividend and earnings growth of the companies indefinitely. They have included re rating. The paper's age does not make it irrelevant - double entry book keeping is centuries old but still relevant. Since 1985, the FTSE 100 has diluted at ~2.4% pa, coincidentally offset by the same amount of expanding relative to GDP. I will try and find similar data for the S&P 500.

Firstly, you don’t understand the word “correlate”.  If you are claiming a relationship with index returns lagging gdp growth by a constant percentage, thats positive correlation. 

Secondly, you chose to ignore the factual evidence.  The link I provided has a plot which shows that in the US returns have weak correlation with GDP.  Not only that, over long term returns have beaten GDP. By an awful lot. 

Thirdly, you make claims as if they are facts. Your claim that return growth cannot outpace dividend growth is not based on empirical evidence.  We”ve seen the opposite over the whole period of stock market existence.  

Last but not least... Here is another paper. Makes a clear point that actual historic returns are not correlated to GDP growth.  You do claim correlation, even if you don’t understand the word.  The paper claims that there is correlation to expectations of GDP growth but thats very different.  http://webdesign.prosperexperiential.com/frameglobal/wp-content/uploads/2018/11/GDP-Growth-and-Equity-Returns-Schroders-2013.pdf

Please read what I have said and stop patronising me. I have a maths degree, I know perfectly well what correlation is.
For the fourth time, I have never used the word correlate, nor has anything I said implied or relied on GDP/index correlation. As you still can't seem to understand this or correlation, but that I am stating that there is a relationship, I'll  try again.

I HAVE NEVER SAID THAT IF YOU COMPARE NOMINAL GDP, OR ANNUAL NOMINAL GDP GROWTH, WITH A STOCK INDEX, OR ITS ANNUAL CHANGES, THAT THERE SHOULD BE ANY SIGNIFICANT CORRELATION.

...
Re; dividends my claims are not factually incorrect, dividend payout ratios have fallen due to the growth of capital intensive tech and healthcare particularly in the S&P 500 and the growth of share buybacks culture. This is not indefinitely sustainable. Also due to boomer demographics the ratio of wealth to GDP in developed economies is at an all time high, capital is cheap, hence the temporary excess of stock indices over GDP. There is no reason to expect this to continue indefinitely - wealth cannot outstrip the economy that generates wealth indefinitely.

And here's a US source showing market cap growing faster than stock indices:
https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.yardeni.com/pub/marketcap.pdf&ved=2ahUKEwid8YHO8LvtAhUTiFwKHXhHBHUQFjADegQICxAB&usg=AOvVaw0TpqVj3_FtsiynCA73NkR9&cshid=1607344447293

1. This what you said: “ most national stock market indices lag their country's GDP by about 2% a year...”
If it were true (it isn’t), it would mean positive correlation between indices and GDP growth.  That’s a fact. You can’t make up facts. 

2. You are also confused about the market cap.  Market cap of a given index cannot grow faster than the index. That’s not what your link is showing at all. It just compares market caps for various indices.  

You do not understand the difference between correlation and a relationship.
It is true.
It is true over the very long term regardless of correlation.
You can have GDP grow at 4% nominal for a century, and the stock market grow at 2% nominal for a century, with different volatility and short term behaviour. The index price wobbles around for all sorts of reasons not to do with GDP, but over the very long term the growth of the index is the growth of the companies in the index, their earnings cannot exceed the growth of the economy they are in. GDP growth is thus a cap on index growth. Over long but finite periods rerating, and stock market earnings fluctuating as a % of GDP can make it appear that this rule is so longer true.

I am not confused about market cap. As the paper I referred to shows, as the S&P 500 and FTSE 100 data I have presented clearly shows, the market cap of those indices has grown faster than the index. You can dispute the data and I may have miscalculated, but the conclusion is "a fact" as you like to say.

And another point about total return, even in a 0 growth would you would still get dividends. So to compare GDP growth with a stock index total return, with a growth and an income component, is not valid.

Edit, another source from MSCI https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.msci.com/documents/10199/a134c5d5-dca0-420d-875d-06adb948f578&ved=2ahUKEwihhcPLkLztAhVQTcAKHfR8CUYQFjALegQIGRAB&usg=AOvVaw2yECfSMHHAykx8dJz6Mt-K

Another_Saver

Deleted_User said:

You cannot compare the total return with GDP, I have never said that, I have only been talking about index price. Dividends are like income. I am talking about growth.

Still no correlation and your statement re 2% lag behind GDP is still wrong.  Dividends depend on taxation systems - among other factors.  That’s why US has low dividends.  Total return has a meaning.  Profit has a meaning.  Index growth net of dividends is a not a particularly meaningful number when comparing to GDP growth. 

...
My statement is still right as all the sources I have referred to prove.
I'm struggling to understand where you got this idea about correlation from and why you think a lack of correlation implies a lack of relationship. Correlation is not required in order for a relationship between two variables to exist.
 If you would just read that first paper by Arnott and Bernstein which is referred to in the MSCI paper (https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.researchaffiliates.com/documents/FAJ-2003-Two-Percent-Dilution.pdf&ved=2ahUKEwiKyNuUlLztAhUyQEEAHRGWDOoQFjACegQIChAB&usg=AOvVaw3k73yZYUiPErU7pmTxLLQD) you would understand.
Index/earnings/dividend/market cap growth are the only meaningful comparables with nominal GDP growth. The total return is meaningless because it includes dividend income which you would receive regardless of whether earnings were growing. You could have a 0 growth economy in which capital owners still draw an income.

itwasntme001

This is quite a good article on market cap vs GDP.

https://voxeu.org/article/big-bang-stock-market-capitalisation-long-run

Well worth a read.

Even under the "singularity" scenario where wealth grows on average at some positive rate of return year after year "forever" (and thus over-time wealth will be seen as growing exponential), you may very well see market cap to GDP mean revert (because GDP will rise a lot and there is a good chance that we move closer to some sort of communist economy, perhaps most closely to China).  I find it hard to believe we are anywhere close to that, especially if you consider how much debt is in the system.  But even if we are moving towards the "singularity", it by definition means that things will get cheaper and cheaper, wealth will have less and less meaning so why the need to risk your capital to grow it?

Perhaps it is better to assume the worse when it comes to your own wealth and now certainly seems like a time to do so given we are at extremes on a multitude of levels.  Not least because I doubt anyone of us will live more than another 80 years or so (during which time there will be many booms and busts), although if you intend to pass on wealth to your heirs, that will change motivations etc.