5 ms·

Say GDP in US is growth 2%, inflation is 3%, and stock market is up 10% a year - where do the extra 5% come from?

by limaoscarjuliet 11y ago

skylan_q 11y ago
Simple. Inflation is 8%. :)
tedunangst 11y ago
Anticipation of future growth. Stock price is net present value of sum of future income.
ant6n 11y ago
concentration of wealth
- ant6n 11y ago
  ok let me rephrase - markets represent the economic winners
parenthesis 11y ago
Not all US economic activity is encompassed by US listed companies; not all sales by US listed companies are in the US; the stock market can go up due to multiple expansion as well as by increased earnings.
rmah 11y ago
The major market indexes are not representative of the overall economy. They are representative of the economic winners. First, public companies tend to be very large. They are the companies that grew at the expense of their competitors. Second, the companies in the major indexes tend to be the winner among public companies. Third, a lot of these larger companies expand overseas, sometimes in higher growth emerging economies. Finally, IIRC, the long-term growth rate of the S&P 500 is 7% or 8% per year. That's about a 2% to 3% premium over GDP growth + inflation. That premium is the "winner" premium.
sytelus 11y ago
This is exactly why we have boom and bust cycles. Markets simply oscillates around the "true" value of assets. I suspect one can model these oscillations using control theory with a positive feedback system. The herd mentality is exactly an example of control system with positive feedback loop. When markets are up, nearly all analysts predict that next day it will be up as well until it isn't and then they all predict doomes day. Ultimately oscillations occur around the true value that is governed by inflation + GDP growth. Market will keep sliding down until it is 10-20% past this true value and then it will keep climbing 10-20% over that value. I wish I'd some time to chart this and test this theory...

Say GDP in US is growth 2%, inflation is 3%, and stock market is up 10% a year - where do the extra 5% come from?

skylan_q 11y ago

Simple. Inflation is 8%. :)

tedunangst 11y ago

Anticipation of future growth. Stock price is net present value of sum of future income.

ant6n 11y ago

concentration of wealth

ant6n 11y ago
ok let me rephrase - markets represent the economic winners

parenthesis 11y ago

Not all US economic activity is encompassed by US listed companies; not all sales by US listed companies are in the US; the stock market can go up due to multiple expansion as well as by increased earnings.

rmah 11y ago

The major market indexes are not representative of the overall economy. They are representative of the economic winners. First, public companies tend to be very large. They are the companies that grew at the expense of their competitors. Second, the companies in the major indexes tend to be the winner among public companies. Third, a lot of these larger companies expand overseas, sometimes in higher growth emerging economies. Finally, IIRC, the long-term growth rate of the S&P 500 is 7% or 8% per year. That's about a 2% to 3% premium over GDP growth + inflation. That premium is the "winner" premium.

sytelus 11y ago

This is exactly why we have boom and bust cycles. Markets simply oscillates around the "true" value of assets. I suspect one can model these oscillations using control theory with a positive feedback system. The herd mentality is exactly an example of control system with positive feedback loop. When markets are up, nearly all analysts predict that next day it will be up as well until it isn't and then they all predict doomes day. Ultimately oscillations occur around the true value that is governed by inflation + GDP growth. Market will keep sliding down until it is 10-20% past this true value and then it will keep climbing 10-20% over that value. I wish I'd some time to chart this and test this theory...