What kind of growth should we expect?
On a long enough timeline, the growth rate for any society drops to near-zero
As we learn from reading Thomas Piketty’s Capital in the 21st Century, economic growth has two factors: population growth and per-capita productivity growth. For stock investors, this growth underlies the growth in the market. Stock market growth over the long term is correlated with growth in corporate profits, and in the aggregate corporations will expect higher revenues and ideally higher commensurate profits during times of strong economic growth.
But what happens when times of rapid economic growth give way to times of slow or no growth? Are we about to find out sooner than expected?
The slow rate of demographic growth in America in the last year was preceded by a slowdown even before the pandemic. But the staggering level of deaths from COVID-19 in the last year has caused the population growth rate to hover around 0.1%, which is actually the estimated rate of growth seen in late antiquity—and vastly lower than the 1.4% that Piketty gives as the average from 1913 to 2012.
Can productivity increases make up for the slowdown in population growth? The deployment of digital tools and automation during the pandemic will probably have a lasting effect and the wave of resignations could free people up for more efficient work—but the market is about totals, and it’s hard to imagine the full difference being made up if demographic trends continue.
What does any of this mean for stock market investors? Keep an eye on the blazing-hot housing market, as the desire to invest in houses and apartment buildings comes up against lowered demand projections. I am not expecting home prices to crater but the home builder stocks and apartment REITs are sometimes vulnerable to even slowing growth. I have already been skeptical of the “re-opening” trades for their unpredictability but now I am also wondering about the profitability of some attractions and destinations while they do re-open and try to navigate the current fraught environment.
Even though a reasonable projection pretty far out into the future would call for very slow long-term population growth and, lacking an unlikely level of constant technical innovation, slow productivity growth, predicting growth levels in the near future may actually be more difficult in some ways. But I tend to think that the forces causing a gap between overall growth and corporate profit growth will continue to accrue for a while. Of course there is the unpredictable course of the pandemic, but in addition there is growing inequality just as the world sits at the cusp of several new technological disruptions, including electric vehicles, 5G, and cryptocurrency.
Add to all that the role of the Fed in backing the market—while a segment on Marketplace claims that the “Fed can’t keep pumping up the economy forever,” that’s just, like, their opinion. The rate of return on stocks will likely continue to outpace the rate of economic growth for the foreseeable future, enough to make it worthwhile to continue investing in the broad market.
Disclosure: Through personal holdings that I control and through investment LLCs in which I am a partner, I buy, hold, and sell stocks, bonds, ETFs, options, and cryptocurrencies, not limited to but including some of those discussed in this newsletter.