I guess I don’t understand how the share prices of companies can long term outgrow the economy, especially given we aren’t a net exporter. It seems like the overall value of stocks should be somehow related to GDP. I understand that part of this is inflation, but isn’t there some physical limit on growth?
If overall the U.S. was a neutral importer/exporter so we were overall only selling to ourselves, a continual 10% real increase would seem unsustainable.
Long term how can stocks outperform the real economy? Isn’t the value of stocks overall a reflection of the overall economy? So the wider I cast my net with the buy and hold strategy, the more my return should relect the real economy growth, right?
Could it be that markets aren’t perfect and the price trends of stocks in general can diverge from underlying economic fundamentals? Seems to me like we are in credit unwind that is revealing real value.[/quote]
S&P earnings grow at about 5.5% per year over the VERY long term. That’s 3% inflation + 2.5% real growth. The 2.5% real growth comes from 1.5% population growth + 1% productivity growth (sometimes the two growth rates are reversed for periods). Animal spirits will fool people from time to time into thinking there’s “something more” out there – hope springs eternal – but the math doesn’t lie. Wall Street analysts, however, do.
