Yet all of these factors may be eclipsed by the most important
macroeconomic trend of the next two decades—the hundreds of mil-
lions of baby boomers from the developed world that are planning to fi-
nance their retirement by selling their financial assets. This chapter will
analyze all these issues, coming to the conclusion that the long-term fu-
ture of equity returns looks bright ifthe United States keeps its capital
markets open to the rest of the world.
GDP GROWTH AND STOCK RETURNS
Some very surprising results are shown in Figure 8-1. In Chapter 1 we
reported on the long-term stock returns of 16 major markets around the
world from 1900 through 2006. The long-term dollar returns of each
country reported against the average real growth of its GDP are plotted
in Figure 8-1a. The results are striking. Real GDP growth is negatively
correlated with stock market returns.^2 That is, higher economic growth
in individual countries is associated with lower returns to equity in-
vestors.^3 Similarly, the stock returns for the developing countries against
their GDP growth are plotted in Figure 8-1b.^4 Again, despite the huge re-
turns chalked up to developing markets in recent years, there is a nega-
tive relation between the returns to individual countries and the growth
rates of their GDP.
Why does this occur? Since stock prices are the present value of fu-
ture dividends, it would seem natural to assume that economic growth
would positively impact future dividends and hence increase stock
prices. But the determinants of stock prices are earnings and dividends
on a per sharebasis. Although economic growth influences aggregate
earnings and dividends favorably, economic growth does not necessar-
ily increase the growth of per shareearnings or dividends. This is because
economic growth requires increased capital expenditures, and this capi-
tal does not come freely.
Implementing and upgrading technology requires substantial in-
vestment. These expenditures must be funded either by borrowing in
the debt market (through the banks, trade credit, or by selling bonds) or
124 PART 2 Valuation, Style Investing, and Global Markets
(^2) This is an update of the chart that was presented in the second edition of Stocks for the Long Run
(1998) as Figure 9-2 but omitted from the third edition.
(^3) Elroy Dimson, Paul Marsh, and Michael Staunton confirm my findings in the Triumph of the Opti-
mists: 101 Years of Global Investment Returns(Princeton, N.J.: Princeton University Press, 2002), but
they do not provide an explanation for it.
(^4) This is an updated version of Chart 16 in Jeremy Siegel, The Future for Investors: Why the Tried and
the True Triumph over the Bold and the New, New York: Crown Business, 2005.