Aaron Brown, Columnist

Stocks Will Need More Than GDP Growth to Prosper

Equities have become disconnected from fundamentals.

March 21, 2018 at 5:20 PM UTC

Aaron Brown is a former head of financial market research at AQR Capital Management. He is also an active crypto investor, and has venture capital investments and advisory ties with crypto firms. He is the author of the soon-to-be-released "Wrong Number."

In it for the long run.
Photographer: Jim Watson/AFP/Getty Images

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Forecasting the long-run return on equities is one of the key challenges in financial planning. Jeremy Siegel, the author of “Stocks for the Long Run,” wrote that he had examined 210 years of stock returns and found that "the real return on a broadly diversified portfolio of stocks has averaged 6.6 percent per year.” Public pension funds make similar assumptions.1521571810761

Forecasts of real long-term gross domestic product growth come in around 1.5 percent to 2.5 percent a year. If the stock market outperforms GDP by 5 percent per year, total stock market capitalization will double as a fraction of the economy every 14 years. Is that sustainable for any extended period of time?1521571893342