Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Ask HN: Is the stock market's growth largely anything more than inflation?

news.ycombinator.com

Post reply on HN
Print view View original

21–30 of 126 posts

Re: Ask HN: Is the stock market's growth largely anything more than inflation?

#21

Post by fdr »

Inflation is (over a long enough time) embedded in stock price, since what you own is really a share of the production and assets of the firm you purchased a share in...it only happens to be denominated in dollars. If a firm you bought stock in is in the business of making shoes, and it is making a larger number of well-received shoes, regardless of the price level for shoes (and the price level of the stock), this kind of stock will generally appreciate in real terms.

In principle, the denominating currency does not matter: someone could give you some number of shoes for your share, and your dividends could likewise be in shoes. We tend to find it more convenient to work in dollars.

Re: Ask HN: Is the stock market's growth largely anything more than inflation?

#22

Post by MrPowers »

Yes, stock market growth is largely driven by the real growth in earnings and dividends.

Nominal figures are not adjusted for inflation. "Real" numbers are adjusted for inflation (in economics-speak).

The stock market (e.g. S&P 500 index) has real earnings that have consistently grown over time (although earnings are quite volatile). The real dividends paid by the companies that make up the stock market have also grown over time.

Jeremy Siegel, a finance professor at Wharton, wrote a great book called Stocks for the Long Run that shows stocks have grown about 7% per year (inflation adjusted) over the last 200 years.

> What would the market look like if we corrected for the money supply?

I think it's better to correct for inflation. The money supply can grow and it doesn't necessarily cause inflation (see the 2008 monetary response to the Great Financial Crisis as an example).

> It seems like the stock markets (USA) growth is strongly correlated to inflation

I'm not sure this is true. In the 70s, inflation was high and stock returns are low. In the 90s, inflation was low and returns were high. In 2021, inflation was high and returns were high.

Re: Ask HN: Is the stock market's growth largely anything more than inflation?

#23

Post by donthellbanme »

dasil003 wrote: post #7

> The more money the government prints the more the stock market goes up. So the market doesn't actually represent value in a company but instead debt owed to somebody else. The second sentence doesn't follow from the first. Owning stock literally means owning part of a company. Now the worth of that ownership is determined by what people are willing to pay, and what people are willing to pay is subject to all the wh…

No post body was provided.

Re: Ask HN: Is the stock market's growth largely anything more than inflation?

#24

Post by nootropicat »

formerkrogemp wrote: post #6
vanniv wrote: post #2

Over time, humans produce capital. Insofar as this capital is productively deployed, one should expect the total amount of capital stock to increase. The stock market represents only a part of the total capital stock, as not all capital is owned by companies, and not all companies are public. But, on the whole, one should expect the stock market to rise over time so long as society is not dying.

> But, on the whole, one should expect the stock market to rise over time so long as society is not dying. That's the rub, eh? Are there limits to the growth on a finite planet? Is climate change posing an existential threat? Has technology produced highly scalable and entirely altogether too interdependent international production systems?

>Are there limits to the growth on a finite planet?

Yes, but we are 4 orders of magnitude away from them. Adding the potential for space industry, this grows to 13 orders of magnitude. That's ~1000 years of 3% annual growth assuming no efficiency gains, but we still have about 8 orders of magnitude available in computation efficiency, which gives us about 1600 years of 3% growth until hitting 2 on the Kardashev scale. Only close to it limits to growth become a real consideration.

Anyone claiming we are hitting fundamental limits of growth now is a doomer. We may be hitting limits of growth given currently deployed technology, but that's a completely different statement.

Re: Ask HN: Is the stock market's growth largely anything more than inflation?

#25

Post by MrPowers »

throw8383833jj wrote: post #8

There are several components that make up long term stock returns (from a macro level): - Population growth - Growth in productivity per capita - Dividends - Inflation It used to be that populations were growing and productivity was increasing and dividends were high (becuase PEs were normal). Those days are all over. You can forget about seeing any return above inflation. Population growth has slown to 0.5% (down fr…

The biggest factor influencing long term stock returns in real growth in earnings.

Companies don't pay out all profits to shareholders as dividends. They can also reinvest in their own business (e.g. build a new factory) or buy back shares.

The go-forward nominal rate of return on stocks should be higher than the inflation rate + the dividend yield. The nominal rate of return could be closer to shareholder yield + inflation (shareholder yield is the dividend yield + share buybacks). I think the real earnings growth is the best predictor of long term returns. Earnings growth is correlated with population growth & productivity growth, but those aren't the only important variables.

Re: Ask HN: Is the stock market's growth largely anything more than inflation?

#26

Post by nick__m »

throw8383833jj wrote: post #15
sleepdreamy wrote: post #9

Earlier quoted context omitted.

So how should I go about investing/creating a portfolio? I'm 29 and finally making decent money. Not sure how to move forward

the most important thing is diversification. First of all, max out your 401K immediately and then get an IRA if you're income is low enough. Within there buy the SPY and maybe VTI (you want as much diversification as possible). Outside, of the 401K and IRA, you also buy SPY, VTI (but remember, you won't be able to sell that in any year where you make income above 40K because of "capital gains", lolz "gains", history…

  Most importantly, try not to pick winners. that's a fools errand.
Trying to pick winner is fun tought and it's a great way to learn. I don't think that there is something wrong with having a few percentage (But start with index and etf because if you start with individual stock you are already over 10% ;)

This series of articles https://www.investopedia.com/articles/basics/11/3-s-simple-i... gives a good overview of how to start investing. However, it don't cover country specific things like taxes and 401k.

Edit: Disclaimer: I know probablay less than throw8383833jj about finance so This is NOT financial advise.

Re: Ask HN: Is the stock market's growth largely anything more than inflation?

#27

Post by david_shaw »

nootropicat wrote: post #24
formerkrogemp wrote: post #6

Earlier quoted context omitted.

> But, on the whole, one should expect the stock market to rise over time so long as society is not dying. That's the rub, eh? Are there limits to the growth on a finite planet? Is climate change posing an existential threat? Has technology produced highly scalable and entirely altogether too interdependent international production systems?

>Are there limits to the growth on a finite planet? Yes, but we are 4 orders of magnitude away from them. Adding the potential for space industry, this grows to 13 orders of magnitude. That's ~1000 years of 3% annual growth assuming no efficiency gains, but we still have about 8 orders of magnitude available in computation efficiency, which gives us about 1600 years of 3% growth until hitting 2 on the Kardashev scale…

> Yes, but we are 4 orders of magnitude away from them. Adding the potential for space industry, this grows to 13 orders of magnitude

Would you mind providing a reference for this? I don't doubt your statements, but it would be great to be able to research further.

Re: Ask HN: Is the stock market's growth largely anything more than inflation?

#29

Post by i3oi3 »

MrPowers wrote: post #22

Yes, stock market growth is largely driven by the real growth in earnings and dividends. Nominal figures are not adjusted for inflation. "Real" numbers are adjusted for inflation (in economics-speak). The stock market (e.g. S&P 500 index) has real earnings that have consistently grown over time (although earnings are quite volatile). The real dividends paid by the companies that make up the stock market have also gro…

I was discussing low-load index investing with a friend, and the 7% over the last 200 years sounds great.

He suggested the hypothesis that that's a reflection of the rise of the United States as a superpower over the last 200 years, and if anything were to impugn the United States' status as the market of refuge, those numbers would not be predictive of consistent long-run returns in the future.

That's a hard hypothesis to refute. Are there similar long-run numbers from all stable countries around the world, or is the US market unique in that aspect?

Re: Ask HN: Is the stock market's growth largely anything more than inflation?

#30

Post by jollybean »

MrPowers wrote: post #22

Yes, stock market growth is largely driven by the real growth in earnings and dividends. Nominal figures are not adjusted for inflation. "Real" numbers are adjusted for inflation (in economics-speak). The stock market (e.g. S&P 500 index) has real earnings that have consistently grown over time (although earnings are quite volatile). The real dividends paid by the companies that make up the stock market have also gro…

I think this is missing a giant factor, which is let's say 'inflation leverage'.

Inflation will hit some parts of the economy differently than others.

Consumer goods, homes, stocks, bonds - different kinds of inflation.

Quantitative Easing and other such policies, may impact the stock market differently than others.

As interest rates drop, the amount of leverage goes up dramatically, causing bubble.

Recent increases in valuations were not commensurate with profits, ergo, an ugly kind of inflation.

Post reply on HN