Why is this time different?

[dtbach]

I will be the contrarian and question your basic premise that we are 'after' anything. I think we are still in the middle of something that is not over yet. One could conjecture that just because we are no longer in the deepest part of the ocean, and were able to come up for air, that does not mean we are on dry land yet.

I can see your point here. You can't know where you are until long after the fact.

 

[donheff]

Not disagreeing at all, though US growth has been decidely tepid recently. But in a word, the future comes down to (relative) innovation. If we're significantly more innovative than other countries, we may continue surprise ourselves to the upside. All sorts of innovation possible still. The countries that drive innovation will do well. If we become more of a "me-too" country WRT innovation in the decades ahead, the pessimists will be closer to "right". Time will tell...

No one knows what the future will bring. I won't be surprised if we malaise along for another two decades. On the other hand, I won't be surprised if we suddenly roar into a bio/nano tech boom. In that later case, I hope I have the sense to slowly go more and more conservative in my AA as we cheer-lead ourselves into another bout of irrational exuberance.

 

[fun in the sun]

Lots of wisdom on this subject. I agree, we can not know where we are, only where we have been or where we want to go. The present is fluid with many variables and unknowns preventing a clear picture.

 

[EvrClrx311]

Just to put things in perspective that a new record doesn't mean we're in a danger zone again... I know this is overly simplistic and ignores a lot of variables like inflation, GDP, P/E ratios.

Looking at the peaks

In Oct 2007 the Dow hit 14,164
In Jan 2000 the Dow hit 11,723

Long-term, more than 100-year performance: Since 1900 (end-of-year 1899), through 2012, I estimate the average total return/year of the DJIA (Dow Jones Industrial Average) was approximately 9.4% -- 4.8% in price appreciation, plus approx 4.6% in dividends.

112 years is a pretty LONG time, and extremely statistically significant. It is hard to argue that the next 100 years won't be somewhat similar to that 9.4% number without making a lot of assumptions about how different our country and economy will be moving forward (some think it will be). True, we are in a rut right now, but do you really think that for 100 years we've seen 9% growth and suddenly 0% decades are going to take over as the norm. That seems a bit extreme to me.

So lets revisit those two peaks listed above... assuming a 9.4% historical pace for the DOW. In order for us to match those Bubbles today we'd be looking at 23,008 for the DOW compared to the 2007 peak, and we'd be looking at 38,377 for the DOW compared to the 2000 peak.

That is, for us to be inflated historically speaking above our 100+ year trend at the same rate we were in 2000, we'd have to see the DOW at 38,377 today. Crazy huh?

Suddenly a new "peak" of 14,500 doesn't seem that abnormal.

What this also suggests is a STRONG bias towards seeing a 50,000 DOW number prior to 2035. Sounds crazy now. Obviously, a lot of the 20th century saw higher inflation that we assume we're going to see moving forward... I'm sure people in 1975 couldn't fathom seeing the DOW with 5 figures, they had just cross the 4 figure mark for the first time. Just like a DOW at 100,000 doesn't make sense to us now, but 25-30 years from now it'll arrive. The real question is, how much will you be able to buy then with the same money today?

Because of all this, I'm not getting crazy over these new "highs"... they are just the medias way of getting you to read the news.

Inflation adjusted... your 14,500 DOW only buys today what 12,143 bought in 2007. In that sense, we won't really hit a new peak relative to inflation figures (that is, a DOW of 0% growth, but tracking inflation only) until we're looking at about 17-18K.

I'm going to step out on a limb and predict that we'll never see the DOW below 10K again. Since the last decade we've hovered around it and crossed it a few times... that might sound like a bold statement. From a statistical/probability standpoint, it really isn't a difficult one to make. DOW is much more likely to hit 20K by 2015, than it is to drop to 9999.

Call me crazy

 

[EvrClrx311]

Good article showing the long long term trend of stocks to follow the 10% yearly return figure:

Average Stock Market Return per year: Last 5, 10, 20 ... Years

• The long-term, more than 100-year performance: Since 1900 (end-of-year 1899), through 2012, I estimate the average total return/year of the DJIA (Dow Jones Industrial Average) was approximately 9.4% -- 4.8% in price appreciation, plus approx 4.6% in dividends. (Some numbers may not add up due to rounding.)
• Since 1929 (year-end 1928 -- i.e., before the crash), through 2012, the return was 8.8% (4.6%, plus 4.2%) [note: see The 1929 Stock Market Crash]
• Since end-of-year 1932 (i.e., after the crash): 11.1% (7.0%, plus 4.2%)
• The average annual stock market return for the past twenty-five calendar years (since 1987) was 10.6% (7.9%, plus 2.7%) The market was up over 40% before the October 19, "Black Monday," crash. After a significant recovery, the Dow actually closed up 6% for the year.
• Stock market returns for the last 20 years (since 1992): 9.6% (7.1%, plus 2.4%) In the middle of one of the longest bull markets in history. [see below for additional 20-year periods]
• Returns since 1999 (13 years) -- the dot-com bubble year-end peak: 3.4% (1.0%, plus 2.4%).
• Returns for the last 10 years (since 2002): 7.2% (4.6%, plus 2.6%) Year-end trough after the dot-com bubble. [see below for additional 10-year periods]
• For the last 5 years (since 2007), 2.6% (-0.2%, plus 2.8%) Year-end peak of housing bubble.
• Since 2008 year-end trough after the housing bubble: 13.4% (10.5%, plus 2.9%)
• For 2012 the stock market (Dow/DJIA) total return was 10.1% (7.3% plus 2.9%)
  • 2012 year-end dividend yield was 2.7%

Observations: Average Stock Market Return Since 19xx (thru 2012)

 

[obgyn65]

No. Thank you for taking the time to clarify.

Sorry you asked?

 

[ripper1]

I hear a lot about "the new normal" in that we should barely expect 4 or 5% returns for the next "" years.

What is different this time?? After the Great Depression the 50s' and 60's were wonderful. After the inflationary 70's, the 80's and 90's were great.

What is different this time Why not expect 7-8% for the next 20 years after the awful 00's??

What is different this time?

A wise man once said, "There are those that don't know and those that don't know they don't know.

 

[Tyro]

A wise man once said, "There are those that don't know and those that don't know they don't know.

Thanks for the compliment, but that was... A long time ago in a galaxy far, far away. . . . and was probably just the beer talking again...

Tyro

 

[Lsbcal]

Regarding the SP500 recent growth rate, it seems to be moving up at about a 7% inflation adjusted rate over recent years.

I like it that many seem to be pessimistic. Love those walls of worry.

P.S. Will try to post my growth charts after the quarter closes late next Friday.

 

[Independent]

Why won't we see a repeat of the US returns of the 20th century? Three ideas:

1) Demographics. Slower population growth => slower economic growth.
2) The 20th century was the "US Century". We did better than other countries. Maybe we should expect a reversion to worldwide averages.
3) The 20th century large cap stock returns don't reflect total equity in the US. McDonald's did great, but how many mom and pop cafes failed because MCD out competed them? Large cap growth included a one-time shift to large organizations.

I'm pretty sure of the first, the other two are more debatable. I'm sure that someone can come up with a short list of reasons to believe the 21st century will be better for investors.
Maybe capital will continue to increase its share of the economic pie as workers bargaining position continues to deteriorate?
Maybe there are huge profits still remaining by deploying already developed technologies in the developing world?

Hard to say. The only thing I know for sure is that any bonds in my portfolio have already locked in "historically low" returns between now and their redemption dates. I'd want to consider that if I were deciding whether to retire today.

 

[clifp]

Not disagreeing at all, though US growth has been decidely tepid recently. But in a word, the future comes down to (relative) innovation. If we're significantly more innovative than other countries, we may continue surprise ourselves to the upside. All sorts of innovation possible still. The countries that drive innovation will do well. If we become more of a "me-too" country WRT innovation in the decades ahead, the pessimists will be closer to "right". Time will tell...

I think a period of slow growth is more likely than not for the US. Berstein's book The Birth of Plenty provides very good insight into the causes of economic growth. If the US productivity growth slows to a 1.5-2.0% and our population growth slows to 0-.5% then we can expect GDP growth to be in the 1.5-2.5% range since there are no other major growth factors in the horizon (like woman entering the work force from the 1940s..)

So I think that it is likely to be a rather frustrating decade or two for American/European workers. I am pretty sure most of us are and/or aspire to be non-workers . I don't think it will be a bad time to be an investor/retiree with a portfolio at all because, we can be our own multinational corporation, making oversea investment searching for higher returns.

This century we saw roughly a billion people transition from subsistence agriculture, in China, India, Brazil to being part of the world economy. These people moved from the "have nothin" to the "have something". Growth rates in these countries have been amazing more than double digits for the decade in China. I see no reason that we should not have another billion people in Africa, Middle East and other parts of Asia make the same transition. While many of the existing billion "have somethings" move solidly into the "have category".

Most economic forecast I've seen predict a 3.5-5% growth in the world's GDP over the next couple of years. Simply gaining access to electricity, and clean running water is huge productivity improvement. When you add the 2% growth of the developed world,to the 7-9% growth of the BRIC, and the double digit growth among countries seeing a shift from "have nothing" to "have something" I see no reason to think we can't get 4-5% real growth in the world over the next few decades. As investor we don't need to do much to capture this growth, some international and/or emerging markets funds, with a healthy exposure to US multinationals is sufficient.

 

[haha]

Why is this time different? Are we convinced that it is different? I am not. To know if something is different takes knowing what came before over as many examples as can be gathered, correctly interpreting those events, and understanding where we are now, which may not be as easy as is often assumed.

I am finding more and more of the post headlines and questions to be assuming so many a priori conditions that I usually cannot respond without taking everything apart, which I don't want to do.

Which doesn’t matter since a forum is a pastime for most, and a business for a few. Who really cares if it makes sense?

Ha

 

[growing_older]

112 years is a pretty LONG time, and extremely statistically significant.

I guess I have to say that I am not so convinced of that. Every decade or so saw significant changes, whether political, social, technological or combinations of all three. We have data from stock values, but the nature of the enterprises and the nature of the business world in which they operated were not always comparable. I think we should be very skeptical that any patterns seen in this data are likely to hold or not going forward. The situation has some similarities, but also significant differences, to historic parallels.

 

[Live And Learn]

Asteroids.

Are they really different ? Or do we just think they are different because we can see the ones that are further away now - even though they continue to have no impact on us ?

 

[ERD50]

112 years is a pretty LONG time, and extremely statistically significant.

I guess I have to say that I am not so convinced of that.

I'm not convinced either. What if I gave you 112 days of weather data? You would see ups, downs, and 'long' and 'short' term trends. But the data would not even encompass two entire seasons, let alone an entire year, or multiple seasons over multiple decades. How would you know from the data that there are four seasons in a year?

When I see 112 years of economic data, how many 'seasons' is that? Maybe a half-dozen economic cycles? Is a half-dozen cycles extremely statistically significant? I doubt it. And I doubt that the underlying powers that drive the seasons are as repeatable as the powers that drive the economic cycles of one country out of many.

-ERD50

 

[tdv2]

There are just too many opinions for the bullish case as well as the bearish case. After living through 2000 and 2008-2009, I'm sick of hearing the talking heads make predictions.

Like many here I started saving for retirement with my first paycheck.
For me, having a plan and sticking to it was key to getting through the bubbles and now I'm within a year or so of pulling the plug and FIRE....50 to 51 is my goal.

looking back....
Didn't take unnecessary risks that could have devastated savings.
Didn't fall into the trap of being too conservative (making decisions based on fear is a bad investment strategy).
Didn't try to time the market.

Ignore the noise, add to your positions regularly, stay the course, rebalance, keep costs low and adjust your risk profile as you get close to the time of needing the funds. I hear this advise time and time again...good news is, it works, at least it has for me (so far).