An NPR listener sent the following note after hearing my interview with Madeleine Brand this afternoon:
I heard your comments today on NPR’s Day to Day. You commented that
the broad stock market return has averaged 10% a year, long term. I
looked back to 1950, the earliest data I could find for the S&P which was
17.29 back then. If it had gone up 10% a year since that time, the S &
P would be over 4000 today. Yesterday’s S&P close was 816. I suggest
that you recalculate and give the listener’s the correct correct number
or substantiate your claim.
Did I screw up?
No, thankfully. It’s just that the 10% number includes dividends, which is the way people normally look at stock market returns. On a pure price basis, returns have been far lower.
In fact, here’s an approximate breakdown of the 10% average return for the last 80 years:
4 points: Dividends
2 points: Real EPS growth
3 points: Inflation (reflected in EPS growth)
1 point: Multiple expansion
Now that stocks have finally dropped back to fair value again, I thinkt the long-term return from here is likely to be in the average range again. The multiple expansion might not continue, and dividends are currently about 3%, not 4%, so it could be lower. But the dividend payout ratio could rise again, and it may be that structural changes (more cash-efficient services companies vs. low-return-on-capital industrial companies) will lead to continued PE expansion.