You should read yesterday morn’s commentary (here), than come back and read Inker. In particular, his piece Explaining Equity Returns.
The five takeaways are as follows:
1) GDP growth and stock market returns do not have any particularly obvious relationship, either empirically or in theory.
2) Stock market returns can be significantly higher than GDP growth in perpetuity without leading to any economic absurdities.
3) The most plausible reason to expect a substantial equity risk premium going forward is the extremely inconvenient times that equity markets tend to lose investors’ money.
4) The only time it is rational to expect that equities will give their long-term risk premium is when the pricing of the stock market gives enough cash flow to shareholders to fund that return.
5) Disappointing returns from equity markets over a period of time should not be viewed as a signal of the “death of equities.” Such losses are necessary for overpriced equity markets to revert to sustainable levels, and are therefore a necessary condition for the long-term return to equities to be stable.
Interesting stuff — worth exploring in greater depth . . .
Reports of the Death of Equities Have Been Greatly Exaggerated: Explaining Equity Returns
GMO, August 2012
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