>Some possible explanations for the discrepancy beween US GDP growth rates
>and Stock Market average growth rates:
>
>(1) Since financial flows are more global than actual production, couldn't
>US stock market averages (especially of elite "blue-chip" shares) grow
>faster than the US GDP because of faster GDP growth elsewhere? E.g.,
>before the recent crisis, the money could have been made in Asia, where
>growth was around say 8% instead of the US 3%, but then invested in US
>stock markets because they're viewed as safer or more prestigious, giving
>the intermediate stock average growth rate of 6%.
What matters is profits, wherever gained, and there's no secular uptrend in the profit share of GDP. I just played with a couple of starting years, 1929 (the beginning of the U.S. national income accounts) and 1950, and a several canned Excel trendlines, and it's flat to slightly down.
>(2) How about a "disposable 'market investment' income" concept: what's
>left over after taxes and consumption? If the marginal propensity to
>consume declines with income and the marginal tax rate does not increase
>enough to compensate, then a given percentage increase in income could lead
>to a greater percentage increase in stock market investment. Of course,
>the trend to greater inequality in income distribution would exacerbate
>this tendency beyond what aggregate income figures would lead one to
>predict.
But the consumption share of GDP hasn't been this high since 1940. There's no declining marginal propensity to consume at the aggregate level over time. Also, indiivduals have been, on balance, heavy net sellers of directly held stock for decades. The buying that's driven the market in the 1990s comes from mutual funds and corporations themselves, buying their own stock and that of takeover targets.
>(3) Is there truth to the rumor that because of corporate stock buybacks,
>there is "more money chasing fewer stocks" and hence stock value inflation;
>or is this an urban--or suburban--myth? Even if true, is it only recently
>true or has it been a long term trend?
Started in the early 80s, paused for a bit in the early 90s, and resumed in earnest in 1995.
>(5) There are even changes in fashion: people who wouldn't have thought of
>dabbling in stocks 20 years ago are now doing so, and not just because they
>have the money, but because everyone is talking about it. It's like
>personal computers, or like cars in the 1950's: a not yet mature market.
>When it does mature, this source of growth will fade.
...or might even turn into a rout. Mutual funds were net sellers of stocks from 1972 to 1981, and vigorous buying didn't start until 1991. So it took the public nearly 20 years to recover from the bear markets of the 1970s. By the way, mutual fund stock purchases averaged about 0.2% of GDP during the "go-go years" of the late 1960s and the nifty fifty mania of the early 1970s; recent buying has been ten times that intense.
Doug