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Comment by bitcurious | Hacker News Reader

One thing that I don’t see addressed in these posts, but I think makes a huge difference, is that the stock price reflects global demand for ROI. It’s entirely possible for stock values to go up while SP500 expected profitability goes down if the expected profitability of other markets goes down even more, shifting money out of Europe/HK/Japan into the USA.

Aka you don’t have to outrun the bear just the other guys.

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And it's important to note that one of the "other guys" is plain cash. Interest rates are near 0, in many places they are negative, so I think it's a fair bet to think "In 10 years it will make more sense to own a sizable investment in the productive capacity of the US, vs dollars which the fed has been printing like crazy."

Value of cash is determined by inflation, not by interest rates. Since the fed prints money to hit inflation targets, this reasoning doesn't really make sense.

Most people are putting that cash somewhere, aka a bank, so interest rates absolutely determine the expected rate of return on that cash.

Yes, but focusing on the interest rates is reasoning from a price change. Interest rates are going down due to central bank action to combat deflationary pressure, so you can’t just look at interest rates in a vacuum and say that the rate of return is going down.

Otherwise why has the value of the dollar increased since early March?

Also, you realize that when the fed “sets rates” it’s not literally the rate of interest in your bank account, right?

Agreed, and nor is this point addressed in the dogmatic claim I see at many places that "markets always go up". They dont go up regularly for japan, greece, italy, australia in the previous decades. Also, all this growth at the cost of others has led to the "historic returns of 7% in s&p", another dogmatic claim in FIRE circles.

It is not clear how these two are sustainable.

> "historic returns of 7% in s&p"

Seven percent is generally accepted as the expected market return over a period of time sufficiently long enough to mitigate systemic risk, not that seven percent is the highest return in market history. Or said another way, if there's ever a chance to buy a treasury bill with a seven percent or better return, take it, because that's the best you'll earn in the market but with much much much less risk.

And why has that not been true for Japanese or Greek markets for decades?

Where does 7% come from? It is Inflation adjusted correct? 2-3% profits, 2-3% gdp growth? 2-3% others (growth at the cost of smaller companies, other countries etc). I'm not sure how this is all sustainable.

Looking at Japan, none of them are sustainable, not even Inflation. Even as bank of Japan prints immense amount of money and props up all the assets as liquidity injections.

Seven percent is the historical return of the US stock market. Other markets have different historical returns. This "comes from" the historical data of US stock prices. Comparison to GDP or inflation rates don't apply.

I might be misunderstanding you.

You said "Seven percent is generally accepted as the expected market return over a period of time sufficiently long enough to mitigate systemic risk, ". Also, When people say "historical return is 7%", they do not say it as a historical fact, but as a forward expectation like you did.

So, you need to provide why 7% is generally accepted, and why not 2%, or 70%.

Comparison to gdp and inflation definitely apply. Business profits in an index grow with Inflation and gdp growth, and stock value is the expectation of future profits discounted over time.

Sorry I wasn’t clear. Generally accepted as in “a good return,” or “the best anyone should expect.” There’s no doubt that seven percent is the historical average.

Oh, and generally accepted as in one could cherry pick certain, short time periods and show that, say for three years in the early 80’s, the average return wasn’t seven percent. So, it’s generally accepted that “over some sufficiently long time period” one should reasonably expect to make seven percent when invested in a sufficiently diverse portfolio of stocks because that’s been the case historically

Why seven percent is considered a good rate of return, I don’t know. The answer is partially in the question itself, because that’s been the rate of return of the stock market. That though isn’t exactly satisfactory

Add to which, to be clear, I'm not defending an economic system that depends on continued growth, nor would I. GDP is and has always been a terrible metric by which to measure economic prosperity. I also do not believe that past performance is a sufficient guarantee of future performance. That said, all of this is orthongal to what has been the historical rate of return of the US stock market.

Great point. I don't think people generally consider what makes up the growth of the stock market. I think two major components are value creation in the real economy (which sort of is what GDP is supposed to measure) and inflation, as you suggest. I think profits are merged into "GDP"? That doesn't account for 7 percent. I can think of another component, "survivorship bias". The market is not all companies, just the ones doing well.

> is that the stock price reflects global demand for ROI

Says who? For which stock? I understand a company's stock price to represent the net present value of the expected future performance of that company alone. I don't see how there can be one expected return on investment that applies equally to all companies, as expected return on investment will be determined heavily by risk which will vary considerably company by company.

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