Pension recovery performance 2020

TBC15

garmeg said:

Can we move on to Fermat's Last Theorem please?

That one’s easy. I’ll give you all the details tomorrow. I don’t have time at the moment as I’ve got a jammed wood chipper to fix.

Another_Saver

I still think the model I supplied shows how GDP and the stock market are related without needing to be correlated. Unless my maths is wrong I have shown GDP and stock market are strongly correlated in nominal and real terms. And the simpler maths of comparing stock indices to GDP as far back as the data I can find for the UK and US goes supports my point that stock indices lag GDP over the very long term, with divergences explained by the three non-economic factors supplied in the model.

[Deleted User]

Its the other way around.  Causation means correlation.  If GDP growth causes the market cap to grow then the two variables are correlated.  No way around it.  Always does. However numerical correlation does not mean causation.  

I am busy today, but do not that GDP growth in developed economies has been steadily decreasing.  The profits and hence valuations/market cap have been growing at the same rate or faster in real terms.  Market Returns have clearly outpaced GDP growth over several decades now. 

Another_Saver

Total returns yes, because of dividends and you can't compare the total return with GDP growth, that is meaningless as the former includes an income element and a growth element. Even in a 0 growth economy capital owners would still receive dividends.

And nominal returns since the mid 80s exceeding gdp is explained by expansion relative to GDP (see the st Louis FRED and voxeu sources, also ftse 100 mkt cap expanding from 40-83% of UK GDP from 1985-2019), and rerating particularly in the US (see S&P 500 PE data from multpl.com) - i.e. 2 of the 3 non economic factors in the model I suggested.

[Deleted User]

Companies pay out a share of their profit in the form of dividends. They decide which share. It varies from country to country. And from industry to industry.  Shareholders may or may not receive dividends regardless of GDP.  Profits do happen even when the economy falls. And some of these profits get reinvested by the companies. Other portions are paid out in the form of buybacks or dividends.  Thats the whole point. As an investor I only care about total returns. 

Market cap has also increased faster than GDP. 

S&P 500 is 3700 today. GDP is 20.81 trillion.
in 1990 S&P 500 was 353.40 (end of 1989). GDP was 5.96 trillion.

In other words, nominal GDP went up by a factor of 3.35 over the last 30 years. S&P 500 went up by more than an order of magnitude.  Market cap has been growing much faster than GDP, particularly as GDP growth has been slowing down.  I haven’t checked your calcs over longer periods but its possible Index underperformed GDP over a certain period.  Certainly in recent decades it has outperformed. There is no rule. 

The thing about “correlations” to market valuations is that they change. Correlations do not remain constant.  Things change.  The way monetary systems operate and market behaves changes. For example the gold standard was completely abandoned as fiat currency was introduced in 1973. Quantitative easing of the last decade.    Changes in the public sector and its size as proportion of GDP.  As economies become more developed, GDP growth has been slowing down.  All these things impact correlations.  

Another_Saver

Deleted_User said:

Companies pay out a share of their profit in the form of dividends. They decide which share. It varies from country to country. And from industry to industry.  Shareholders may or may not receive dividends regardless of GDP.  Profits do happen even when the economy falls. And some of these profits get reinvested by the companies. Other portions are paid out in the form of buybacks or dividends.  Thats the whole point. As an investor I only care about total returns. 

Market cap has also increased faster than GDP. 

S&P 500 is 3700 today. GDP is 20.81 trillion.
in 1990 S&P 500 was 353.40 (end of 1989). GDP was 5.96 trillion.

In other words, nominal GDP went up by a factor of 3.35 over the last 30 years. S&P 500 went up by more than an order of magnitude.  Market cap has been growing much faster than GDP, particularly as GDP growth has been slowing down.  I haven’t checked your calcs over longer periods but its possible Index underperformed GDP over a certain period.  Certainly in recent decades it has outperformed. There is no rule. 

The thing about “correlations” to market valuations is that they change. Correlations do not remain constant.  Things change.  The way, monetary systems operate and market behaves changes. For example the gold standard was completely abandoned as fiat currency was introduced in 1973. Quantitative easing of the last decade.    Changes in the public sector and its size as proportion of GDP.  As economies become more developed, GDP growth has been slowing down.  All these things impact correlations.  

Re total return maybe I'll bother to do that calculation tonight, but you could take the index, its earnings or its dividends (amounts not yields or ratios). Over the long term you would expect these to be very strongly correlated so to arbitrarily add two and expect the same result doesn't seem valid to me. If we go off my model I expect the total return index and GDP to diverge over time due to the effect of compounding dividends.

Stock Indices have lagged GDP over the fullest decent datasets I could find though I'm sure less reliable longer term data are available ( UK GDP back to 1948, multpl.com us GDP data back to 1929). I would expect the same results.

Arnott and Bernstein suggest that while market cap follows GDP, the index price lags by the amount of dilution from IPOs, options and new rights issues.

The Voxeu source shows that since the mid 80s global stock markets caps have expanded from a longer term average around 30-40% of their countries GDP to over 100%. This is a structural change, I think it's the Boomers growing the wealth to GDP ratio, I don't think it's necessarily a permanent change (but is anything?). You can also see from multpl.com the S&P 500's valuation is much higher than it was in 1990, and from the st Louis FRED source that corporate profits as a % of us GDP were ~4.5-5.0% in 1990, 10% in the latest available data.

So we aren't disagreeing when you observe that the S&P and its market cap (if I assume that the market cap growth has exceeded the index growth) have outgrown GDP since 1990. All I'm saying is there are reasons for that. These changes may/may not be structural/permanent but I do not think that is sufficient to argue that these changes are continuing - valuations cannot rise indefinitely, the stock market cannot outgrow the economy indefinitely.

If you don't believe me on the mkt cap and stock index not being equivalent, for a really easy example go to the all fact sheets page of FTSErussell.com, select an index, say the FTSE all share for convenience, take the latest factsheet and the oldest available in the archive, and compare how the market cap between the two dates has changed with how the FTSE all share Index has changed.

31/1/20 4057.47 and 2290770
30/11/20 3542.87 and 2092828
The index on 30/11/20 was 87.32% of its 31/1/20 value, the mkt cap on 30/11/20 was 91.36% of its 31/1/20 value. The mkt cap has outgrown the index by 4.63%. That is capital dilution.


No dispute re: your points about change in general. Im just presenting data. 

[Deleted User]

“we aren't disagreeing when you observe that the S&P and its market cap (if I assume that the market cap growth has exceeded the index growth) “

Again, index is weighted market cap of free floating shares. Not all shares are free floating but I was referring to the index.  As you see in my example over 30 years index has massively outperformed GDP.  That’s long enough period for me. 

Thats data. You can go to prehistoric times. Not sure how it helps. Everything was different the further back you go.  Perhaps during periods of high inflation or if the gold standard is used or when the pension system is different or when the economy was developing it impacted GDP differently. Its pretty clear that GDP has slowed down but the returns have not. 

Linton

Another_Saver said:

Deleted_User said:

Companies pay out a share of their profit in the form of dividends. They decide which share. It varies from country to country. And from industry to industry.  Shareholders may or may not receive dividends regardless of GDP.  Profits do happen even when the economy falls. And some of these profits get reinvested by the companies. Other portions are paid out in the form of buybacks or dividends.  Thats the whole point. As an investor I only care about total returns. 

Market cap has also increased faster than GDP. 

S&P 500 is 3700 today. GDP is 20.81 trillion.
in 1990 S&P 500 was 353.40 (end of 1989). GDP was 5.96 trillion.

In other words, nominal GDP went up by a factor of 3.35 over the last 30 years. S&P 500 went up by more than an order of magnitude.  Market cap has been growing much faster than GDP, particularly as GDP growth has been slowing down.  I haven’t checked your calcs over longer periods but its possible Index underperformed GDP over a certain period.  Certainly in recent decades it has outperformed. There is no rule. 

The thing about “correlations” to market valuations is that they change. Correlations do not remain constant.  Things change.  The way, monetary systems operate and market behaves changes. For example the gold standard was completely abandoned as fiat currency was introduced in 1973. Quantitative easing of the last decade.    Changes in the public sector and its size as proportion of GDP.  As economies become more developed, GDP growth has been slowing down.  All these things impact correlations.  

Re total return maybe I'll bother to do that calculation tonight, but you could take the index, its earnings or its dividends (amounts not yields or ratios). Over the long term you would expect these to be very strongly correlated so to arbitrarily add two and expect the same result doesn't seem valid to me. If we go off my model I expect the total return index and GDP to diverge over time due to the effect of compounding dividends.

Stock Indices have lagged GDP over the fullest decent datasets I could find though I'm sure less reliable longer term data are available ( UK GDP back to 1948, multpl.com us GDP data back to 1929). I would expect the same results.

Arnott and Bernstein suggest that while market cap follows GDP, the index price lags by the amount of dilution from IPOs, options and new rights issues.

The Voxeu source shows that since the mid 80s global stock markets caps have expanded from a longer term average around 30-40% of their countries GDP to over 100%. This is a structural change, I think it's the Boomers growing the wealth to GDP ratio, I don't think it's necessarily a permanent change (but is anything?). You can also see from multpl.com the S&P 500's valuation is much higher than it was in 1990, and from the st Louis FRED source that corporate profits as a % of us GDP were ~4.5-5.0% in 1990, 10% in the latest available data.

So we aren't disagreeing when you observe that the S&P and its market cap (if I assume that the market cap growth has exceeded the index growth) have outgrown GDP since 1990. All I'm saying is there are reasons for that. These changes may/may not be structural/permanent but I do not think that is sufficient to argue that these changes are continuing - valuations cannot rise indefinitely, the stock market cannot outgrow the economy indefinitely.

If you don't believe me on the mkt cap and stock index not being equivalent, for a really easy example go to the all fact sheets page of FTSErussell.com, select an index, say the FTSE all share for convenience, take the latest factsheet and the oldest available in the archive, and compare how the market cap between the two dates has changed with how the FTSE all share Index has changed.

31/1/20 4057.47 and 2290770
30/11/20 3542.87 and 2092828
The index on 30/11/20 was 87.32% of its 31/1/20 value, the mkt cap on 30/11/20 was 91.36% of its 31/1/20 value. The mkt cap has outgrown the index by 4.63%. That is capital dilution.


No dispute re: your points about change in general. Im just presenting data. 

I venture in and will probably will have to run away again but..
Why do you think your figures are noteworthy?  Surely the market cap is as related to the number of shares as to the price whereas the index just follows the price.

For example if a large company offers new shares and attracts exactly the right new money to fund a take-over of a private company such that the price remains unchanged the total market cap will increase but the Index will stay the same, which is fair enough since no-one has lost or gained.  The reverse will happen when a company goes private.  The total market cap will fall but the index will stay the same using the notional money released to "buy" more shares in the companies remaining in the index.

Another_Saver

That does not mean you can assume that this is normal, the way it works, or accept it without questioning why. 

Year end 89/start 90 to year end 19/start 20
S&P 500 total return 10.1% (geometric annualised growth rate)
Dividend yield 2.09%

Index growth 7.85%

Of which CPI 2.38%
PE expansion 1.67%
Expansion of corporate profits to GDP ratio 2.41% (less accurate but still valid, this data is only provided quarterly not at discreet times like the other measures, I used Q4 1989 and Q4 2019)

I don't have market cap data to make a capital dilution calculation, but deducting those 3 factors leaves 1.17% "real growth" (because I have deducted the expansion of corporate profits relative to GDP you could call this real internal growth, or something).

Real GDP growth was 2.10%.

Plug these numbers into my model, the rate of dilution was -0.92% pa.

I would expect, because of the dot com bubble, and rise of options culture that the actual degree of dilution between the market cap and index price is greater than that.

Another_Saver

Linton said:

Another_Saver said:

Deleted_User said:

Companies pay out a share of their profit in the form of dividends. They decide which share. It varies from country to country. And from industry to industry.  Shareholders may or may not receive dividends regardless of GDP.  Profits do happen even when the economy falls. And some of these profits get reinvested by the companies. Other portions are paid out in the form of buybacks or dividends.  Thats the whole point. As an investor I only care about total returns. 

Market cap has also increased faster than GDP. 

S&P 500 is 3700 today. GDP is 20.81 trillion.
in 1990 S&P 500 was 353.40 (end of 1989). GDP was 5.96 trillion.

In other words, nominal GDP went up by a factor of 3.35 over the last 30 years. S&P 500 went up by more than an order of magnitude.  Market cap has been growing much faster than GDP, particularly as GDP growth has been slowing down.  I haven’t checked your calcs over longer periods but its possible Index underperformed GDP over a certain period.  Certainly in recent decades it has outperformed. There is no rule. 

The thing about “correlations” to market valuations is that they change. Correlations do not remain constant.  Things change.  The way, monetary systems operate and market behaves changes. For example the gold standard was completely abandoned as fiat currency was introduced in 1973. Quantitative easing of the last decade.    Changes in the public sector and its size as proportion of GDP.  As economies become more developed, GDP growth has been slowing down.  All these things impact correlations.  

Re total return maybe I'll bother to do that calculation tonight, but you could take the index, its earnings or its dividends (amounts not yields or ratios). Over the long term you would expect these to be very strongly correlated so to arbitrarily add two and expect the same result doesn't seem valid to me. If we go off my model I expect the total return index and GDP to diverge over time due to the effect of compounding dividends.

Stock Indices have lagged GDP over the fullest decent datasets I could find though I'm sure less reliable longer term data are available ( UK GDP back to 1948, multpl.com us GDP data back to 1929). I would expect the same results.

Arnott and Bernstein suggest that while market cap follows GDP, the index price lags by the amount of dilution from IPOs, options and new rights issues.

The Voxeu source shows that since the mid 80s global stock markets caps have expanded from a longer term average around 30-40% of their countries GDP to over 100%. This is a structural change, I think it's the Boomers growing the wealth to GDP ratio, I don't think it's necessarily a permanent change (but is anything?). You can also see from multpl.com the S&P 500's valuation is much higher than it was in 1990, and from the st Louis FRED source that corporate profits as a % of us GDP were ~4.5-5.0% in 1990, 10% in the latest available data.

So we aren't disagreeing when you observe that the S&P and its market cap (if I assume that the market cap growth has exceeded the index growth) have outgrown GDP since 1990. All I'm saying is there are reasons for that. These changes may/may not be structural/permanent but I do not think that is sufficient to argue that these changes are continuing - valuations cannot rise indefinitely, the stock market cannot outgrow the economy indefinitely.

If you don't believe me on the mkt cap and stock index not being equivalent, for a really easy example go to the all fact sheets page of FTSErussell.com, select an index, say the FTSE all share for convenience, take the latest factsheet and the oldest available in the archive, and compare how the market cap between the two dates has changed with how the FTSE all share Index has changed.

31/1/20 4057.47 and 2290770
30/11/20 3542.87 and 2092828
The index on 30/11/20 was 87.32% of its 31/1/20 value, the mkt cap on 30/11/20 was 91.36% of its 31/1/20 value. The mkt cap has outgrown the index by 4.63%. That is capital dilution.


No dispute re: your points about change in general. Im just presenting data. 

I venture in and will probably will have to run away again but..
Why do you think your figures are noteworthy?  Surely the market cap is as related to the number of shares as to the price whereas the index just follows the price.

For example if a large company offers new shares and attracts exactly the right new money to fund a take-over of a private company such that the price remains unchanged the total market cap will increase but the Index will stay the same, which is fair enough since no-one has lost or gained.  The reverse will happen when a company goes private.  The total market cap will fall but the index will stay the same using the notional money released to "buy" more shares in the companies remaining in the index.

Yep that's how it works, the FTSE 250 is an example of the reverse happening, the index has outgrown the mkt cap by about 2.9% since 12/10/92 (£98bn at inception on 12/10/92 when I think the index price was 2403 but you can check that, Google 25 years of the FTSE 250 infographic/yahoo! Finance, I have worked this out properly previously, recent mkt cap from FTSE Russell fact sheets).

Edit:
12/10/92 FTSE 250 2403, mkt cap 98
30/11/20 FTSE 250 20,182.7 mkt cap 356
Mkt cap grew 4.78% pa

Index grew 7.80% pa

Difference 2.88%

Re your example of dilution, by issuing shares at the same price,
that diluted existing shareholder's proportionate ownership of the co, and this diluted their share of the future returns. It does not cause a loss but it does create a lag.

I used the FTSE all share recently as an example as Mordko earlier doubted that this happens. It should be noted this phenomenon is just as volatile as earnings and prices.