I don’t like to call the stock market. That seems to involve too much risk of embarrassment to qualify as a hobby. And this is supposed to be a hobby.

But since I started this blog and for a while before that too, I have viewed the stock market as roughly fairly priced to deliver the subpar returns implied by depressed risk-free interest rates, slow growth, and low underlying economic volatility. I updated that take **here**.

Looking backwards, returns have recently slowed dramatically and have been “subpar”, strictly speaking. But they have been a bit closer to typical than I would have guessed – and continue to wildly guess looking forward.

I define the typical or “par” real return as simply the slope coefficient in a regression of the log total real return index on a trend line, estimated from 1870 to today. That is 6.6% a year, which is just a smidge above what is conventionally said to be the trend return. (Whether that trend is anchored in a reliably-replicable process or is just the result of survivorship bias is a separate discussion. Here, I am just defining terms.)

For the six years ending in 2014, equities returned about 15 ½% a year, as the equity market went from cheap to (perhaps) fair, and the cumulative return index went from far below-trend to slightly above-trend.

If equities were to flatline from here to year end, then the real return for 2016 would be about 6% and the return for the past two years collectively would be about 4%. So, yes, returns have been subpar, but only marginally.

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