Kevin Spires, CFA, FRM
As 2012 comes to a close, the number of analysts making predictions about future stock market returns has multiplied faster than the number of Jos. A Bank commercials on the financial news channels. Before I give my own predictions (in another upcoming post), I thought I would flash back to one of 2012's most memorable spats: Jeremy Siegel vs. Bill Gross on expected returns going forward in the stock market. It started out with Bill Gross's Cult Figures online newsletter posting which took shots at the "Siegel" constant of 6.6% real return of stocks over the long run. In a Bloomberg TV spat, Siegel defended his number and pointed out the errors in Gross's logic and calculations.... Gross responded with Ad-hominem.
In his written piece, Gross attempts to back into the expected return on stocks by making stock market returns a function of Real GDP...
As 2012 comes to a close, the number of analysts making predictions about future stock market returns has multiplied faster than the number of Jos. A Bank commercials on the financial news channels. Before I give my own predictions (in another upcoming post), I thought I would flash back to one of 2012's most memorable spats: Jeremy Siegel vs. Bill Gross on expected returns going forward in the stock market. It started out with Bill Gross's Cult Figures online newsletter posting which took shots at the "Siegel" constant of 6.6% real return of stocks over the long run. In a Bloomberg TV spat, Siegel defended his number and pointed out the errors in Gross's logic and calculations.... Gross responded with Ad-hominem.
In his written piece, Gross attempts to back into the expected return on stocks by making stock market returns a function of Real GDP...
Yet the 6.6% real return belied a commonsensical flaw much like that of a chain
letter or yes – a Ponzi scheme. If wealth or real GDP was only being
created at an annual rate of 3.5% over the same period of time, then somehow
stockholders must be skimming 3% off the top each and every year. If an
economy’s GDP could only provide 3.5% more goods and services per year, then how
could one segment (stockholders) so consistently profit at the expense of the
others (lenders, laborers and government)?
Basically saying that equity investors have stolen 3% per year over the last century plus from others - and projects stocks returns will come in at about 2% real going forward.
Siegel sticks with the actual building blocks of stock returns - where real gdp growth is just one component. Dividend payouts and capital gains due to stock buybacks figure just as strongly in return expectations as real gdp growth.
I am going with Siegel over Gross and I expect long run (30+ years) returns of a bit below 6%. I expect I will break down all my factors in a rough manner in another post before year end 2012.
Siegel sticks with the actual building blocks of stock returns - where real gdp growth is just one component. Dividend payouts and capital gains due to stock buybacks figure just as strongly in return expectations as real gdp growth.
I am going with Siegel over Gross and I expect long run (30+ years) returns of a bit below 6%. I expect I will break down all my factors in a rough manner in another post before year end 2012.
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