Stocks for the Long Run: Authers vs Clements

March 25, 2009

John Authers, the FT’s "Short View" columnist, takes a big step back today to look at the really long view, with charts going back to 1802. He notes that long-dated government bonds have outperformed stocks over the past 40 years, and he gets a great quote from Robert Arnott:

The notion that the long run will bail you out no matter what stupid things you do in the short run I think is dead,” says Robert Arnott, who examines such performance in a forthcoming article for the Journal of Indexes. “And the notion that if you have the better asset class it doesn’t matter what you pay for it is on its deathbed.”

I’m not entirely convinced by this: we’re comparing the performance of government bonds against stocks when government bonds are at the top of a huge bubble and stocks are at multi-decade real lows. But I’m equally unconvinced by Jonathan Clements:

Over the past 60 years, gross domestic product has climbed 6.8% a year–and shares prices have climbed 7%, as measured by the Standard & Poor’s 500-stock index. On top of that 7% a year, investors also collected dividends.
True, share prices didn’t climb in lockstep with the economy and, indeed, investors had to suffer through some horrendous bear markets. Still, as long as the economy continues to grow over the long haul, the stock market should remain a decent long-run investment.

Why is 60 years a useful timeframe? Very few of us invest for 60 years, no matter how early we start. And the future relationship between the stock market and GDP growth is entirely a function of the way in which future growth accrues to capital rather than to labor; I suspect the pendulum is going to swing back on that front, which means that stock-price growth could lag GDP growth indefinitely. And that’s even assuming, as Clements does, that GDP growth will continue to be relatively healthy over the long term.

Besides, Clements has lost a lot of sympathy with his poor-me column in the WSJ complaining about the hardships of earning more than $250,000 a year:

By mid-October, I will hit $250,000 in total income — and have no incentive to earn any more income in 2009.
At that point, I plan to ask Citi for an unpaid sabbatical. Forget earning more income. There’s no point. Instead, you will find me hunkered down at home, desperately trying not to spend money. This will make entire financial sense for the Clements household. What about the struggling economy? Not so much.

Actually, Jonathan, the struggling US economy really does not have a desperate need for you to earn more than a quarter of a million dollars a year — especially since you’re very likely to simply save that money, rather than spend it. Maybe Citigroup can take the money it would otherwise be paying you and give it in bonuses to underpaid bank tellers instead. Then the struggling economy gains, and you don’t need to worry about your taxes. We all win!

(HT: Chittum)

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