>Your very good article in the latest LBO left me
>perplexed on one issue. I hope I am not too
>punctilious.
Never.
>But, you say that it is *true* that the
>*average* 30-year "look back" return on the stock
>market is 6%, with wide variations. But then you later
>on question how anyone could expect that stock market
>(as a whole) to exceed in its returns the growth of the
>economy, i.e., if economic growth is 3%, so too ought
>to be the stock market's.
>
>But it seems to me that the *average* annual economic
>growth for the period you graphed is *lower* than 6%.
>In other words, the history you gave seems to indicate
>stock market returns have historically exceeded gnp
>growth.
>
>I can think of any number of possible reasons. For one
>thing, it may be that a weighted average of debt and
>stock returns would more likely reflect gnp growth than
>just stock returns. But there are kazillions of
>possibilities. So I'd like some illumination, because
>I'm feeling benighted. -gn
A 6-7% stock return is about twice the rate of long-term U.S. GDP growth. The SS privatizers are assuming more like five times. But the fact is that no one really has a good explanation of why the stock market has historically done as well as it has. It doesn't make sense from this sort of growth comparison, and it doesn't make sense from standard (CAPM) financial models, in which return is a function of risk: the long-term return is far higher than risk-based models predict.
Of course, there's a surivorship bias in simulating returns over the very long term: weak stocks are pruned from the index and strong performers are added (e.g. AOL's recent addition to the S&P 500). So the indexes overstate the returns claimed by actual stockholders for this, and many other, reasons.
Doug