Historical S&P500 Returns vs. Inflation vs. GDP | TigerDroppings.com
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Cmlsu5618
McNeese State Fan
Destin, FL
Member since Sep 2010
3618 posts

Historical S&P500 Returns vs. Inflation vs. GDP

This is a question that I've thought about for a while here... Why is the S&P historically able to generate an average 6-7% RoR, when inflation and GDP growth are typically around 2-3%?

I'm not sure about money supply figures, but I would imagine average MS growth is around the 2-3% inflation target.

How is the stock market continually able to generate returns much greater than inflation and GDP growth?


LSURussian
LSU Fan
Member since Feb 2005
85152 posts

re: Historical S&P500 Returns vs. Inflation vs. GDP
The value added from the invested capital had better be greater than inflation over the long term or investing would cease.


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BennyAndTheInkJets
Arkansas Fan
NYC / Orange County
Member since Nov 2010
4290 posts

re: Historical S&P500 Returns vs. Inflation vs. GDP
Because you always want to be compensated for taking risk. If you only made as much as the economy grew or just enough to keep purchasing power steady, why would you take more risk?

People have to be incentivized to take risk, that goes outside of just investing into entrepreneurship and even social programs. Why would I take a risk starting a business when I pay all my profits in taxes or why would I look for a job when I can just keep getting paid by social programs?

"Greed....for lack of a better term... is good."


Cmlsu5618
McNeese State Fan
Destin, FL
Member since Sep 2010
3618 posts

re: Historical S&P500 Returns vs. Inflation vs. GDP
quote:

compensated for taking risk


I guess I didn't ask the question correctly.

I understand the risk/return relationship and that equities are a great way to beat inflation on the long-term, it's more of just a "where does the new money come from?"

Does the money supply grow at a much faster rate than inflation? Does external investment from other countries have a large bearing on historical growth?
This post was edited on 7/11 at 10:45 am


BennyAndTheInkJets
Arkansas Fan
NYC / Orange County
Member since Nov 2010
4290 posts

re: Historical S&P500 Returns vs. Inflation vs. GDP
quote:

"where does the new money come from?"

Cash on the sidelines, external sources of investment, and leverage.
quote:


Does the money supply grow at a much faster rate than inflation?


PY=MV

Price * Real Growth = Money Supply * Velocity of Money

Money supply may grow but if the velocity of money changing hands is lower then there won't be inflation.
quote:

Does external investment from other countries have a large bearing on historical growth?


GDP = Total Income = Total Expenditure

GDP = Y = C+I+G+NX

= Consumption + Invesment + Gov Spending + Net exports

Depending on the country the components of GDP will change. For emerging countries its Exports and Investment, for the US its been consumption, government spending, and investment. There were times in our history that investment was a very high portion.
This post was edited on 7/11 at 10:57 am


Cmlsu5618
McNeese State Fan
Destin, FL
Member since Sep 2010
3618 posts

re: Historical S&P500 Returns vs. Inflation vs. GDP
Thank Benny.

I appreciate the input. I see the relationship that M&V have with inflation, and it actually makes more sense seeing that equation.

I guess I was just trying to get a clear answer on how the S&P has had a track record of a 6-7% growth rate and how that was accomplished. I think learning about how inflation really works cleaned it up a bit for me.


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