When talking about residential property, people sometimes throw around the idea that over the very long-term aggregate home prices can't rise faster than aggregate income. i.e. even if for a while home prices continue to grow to consume a larger portion of a person's income than they did historically, eventually it would consume 100% of a person's income, at which point prices could only rise as fast as increases in income.

I was curious whether the stock market follows any similar line of reasoning. i.e. the total return on the stock market being bounded over the very long-term by increases in the aggregate income of the world.

I suspect I've taken an extremely simplistic view of things here, but I'm curious:

What factors asymptotically bound the return of the stock market, i.e., returns over the very long-term?

closed as off-topic by littleadv, Dheer, C. Ross Oct 20 '13 at 18:02

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I am a believer in that theory. My opinion is that over the long term, we can expect 25% of income to reflect the payment on one's mortgage, and if you drew a line over time reflecting the mortgage this represents plus the downpayment, you'd be very close to a median home price. The bubble that occurred was real, but not as dramatic as Schiller's chart implies. $1000 will support a $124K 30yr mortgage, but $209K at 4%. This is with no hype, and exact same supply/demand pressures.

The market cap of all US companies adds to about $18T. The total wealth in the US, about $60T. Of course US stocks aren't just held by US citizens, it's a big world.

Let me suggest two things - the world is poor in comparison to much of the US. A $100,000 net worth puts you in the top 8% in the world. The implication of this is that as the poorer 90% work their way up from poverty, money will seek investments, and there's room for growth.

Even if you looked at a closed system, the US only, the limit, absent bubbles, would be one that would have to put a cap on productivity. In today's dollars we produce more than we did years ago, and less than we will in the future. We invent new things faster than the old ones are obsoleted. So any prognostication that our $18T market can grow to say, $30T, does not need to discuss P/Es or bubbles, but rather the creation of new products and businesses that will increase the total market.

To summarize - Population growth (not really discussed), Productivity, and long term reduced Poverty will all keep that boundary to be a growing number.

That said, this question may be economic, and not PF, in which case my analysis is bound for the Off-Topic barrel. Fascinating question.

  • Wow! I'm in 1%!!! how come I live in a 1bd condo with a mortgage??? – littleadv Oct 17 '13 at 2:07
  • Well, my friend, that site puts things in perspective. For income, the average USer is a 1% in the world. We are rich as a nation. No politics, just stats. – JoeTaxpayer Oct 17 '13 at 2:09

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