The Drivers Of Stock Market Returns Over The Last 10 Years

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During their latest episode of the VALUE: After Hours Podcast, Taylor, and Carlisle discussed The Drivers Of Stock Market Returns Over The Last 10 Years. Here’s an excerpt from the episode:

Tobias: Why do you think it was such a weird decade for value?

Jake: You got to save that one for therapy couch there, buddy. [laughs]

Tobias: No, I’m going to ask you now. Why not? Why do you think it was such a weird decade–? Because I always say like, you wrote that great article showing that the dispersion between the cheap stuff and the expensive stuff was as tight as it has ever been. If I’d have been smarter, I’d have said, “Well, then, what does that mean?”

Jake: Yeah. And now what?

Tobias: It means that quality is probably on sale. You can buy good, better-quality stuff for cheaper. That’s the arbitrage. Now, it’s the other way around.

Jake: Alas, you and I were not smart enough to take that next step.

Tobias: I read that article. I processed it. I put it up on my side.

Jake: Understood it.

Tobias: Understood it. Didn’t ask the next question.

Jake: Then started sucking my thumb, basically.


Jake: I don’t know. I mean, there’s interest rate arguments. Low rates make these future cash flows not as discounted. There’s economies of scale that work affect things that are on some of these big businesses that allowed them to scale without much new capital. Like, the difference between growing a Facebook versus growing a standard oil and the amount of capital that you would need to drive business is just different beasts. So, recognizing that.

Tobias: I think interest rates has got to be a big part of that, hasn’t it? That’s the most glaring– The reason I ask before I say that, if we can’t diagnose– [crosstalk]

Jake: Tell me the answer before you ask me the question.

Tobias: Why don’t know the answer.

Jake: [laughs]

Tobias: But if we can’t diagnose the last 10 years, then what hope have we got of being appropriately positioned for the next 10 years? That’s my wild thought.

Jake: Oh, yeah. So, we can’t diagnose. So, where did the returns come from? That 16.6% annualized return of the S&P 500 from 2011 to 2021, where did that come from? Revenue growth was pretty normal. Share count shrunks somewhat.

Tobias: Is that unusual?

Jake: No, I think it was a little bit more than normal. But if I remember right, it wasn’t extreme. Margins expanded some.

Tobias: That was unusual. Margins have gone well beyond where they had previously been reverted.

Jake: Right. And that could be some of the explanation of, well, corporate taxes were lower. That’s going to help your margin. Employees share of GDP didn’t really go a lot of places. So, that’s going to help your margins, if you’re a business– Labor was cheaper. Labor lost.

Tobias: You think that’s because labor got paid with a lot of equity?

Jake: I don’t know.

Tobias: Is that 15% share based compensation in the service sector?

Jake: I don’t know.

Tobias: White collar rather than service?

Jake: Yeah, I was going to say tell that to all the baristas– [crosstalk]

Tobias: Or, meant to whit collar rather than– [crosstalk]

Jake: Yeah, perhaps.

Tobias: If you’re a big tech employee, you’ve done pretty well in the SBC.

Jake: Dividends were pretty standard. And that leaves then multiple. And multiple carried a huge chunk of that. So, what’s driving the multiple? The enthusiasm and interest rates drive a lot of the multiple.

Tobias: Yeah.

Jake: So, we can lay the foundation of where did it come from. That’s not really so much like value versus something else, but that’s just where did the market’s returns come from. So, where the next 10 years? Which of those levers are you going to pull to get another great decade? Is it going to be revenue growth? Oh, by the way, if we remember back to when we talked about this, 2011 to 2021, revenue grew actually slower than 2000 to 2010, which was a lost decade for stocks. So, top line was actually worse in that decade where everyone crushed it in the S&P 500. So, I don’t know what the next 10 years necessarily, but it’s hard to imagine that it’s not going to be– You are get 5%, right? Maybe you’ll get GDP or 2%, I don’t know.

Tobias: I thought 3.2 from using– But that assumes that we end the decade at the long run average multiple. So, we end the decade at 16 times, 17 times on a PE multiple basis.

Jake: Yeah.

Tobias: That doesn’t account for any margin contraction, but 3.2%, 1.7% of that is dividends, the other, whatever that is, 1.5% on the index.

Jake: So, revenue is likely to come in at normal. Share count, I don’t know how much more you can borrow and buy back shares, again. Dividends are probably going to be relatively normal. Share count might actually grow. Companies come up short and have to get money in the door, they issue shares, and that will hurt you. Like, you actually add to the total share count. Margin, again, with these really high margins already, is that going to grow from here? Gosh, I’ve been very wrong about the ability to keep growing that. But at some point, you got to run up against some ceiling of what corporate America is allowed to take in this whole system.

Then that leaves multiple. And you start off with a high multiple. I guess, you can go to a higher multiple, but how much of your return are you pulling forward with a high multiple already? Ah, it’s just doesn’t leave you real enthusiastic, does it?

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