Crecimiento económico según Crestmont Research
During the last century, real economic growth averaged near 3%. The previous three completed decades delivered 3.2%, 3.0%, and 3.2% respectively. Yet, the most recent decade (2000-2009) posted real economic growth just below 2%. Is this an aberration or a new trend?
Aberration
Aberration is our first scenario. Numerous economists were consulted and various data were evaluated—there do not appear to be generally-recognized reasons that explain the sudden shift in real economic growth during the current decade to near two-thirds of both the historical average and prior three decades. The most reasonable explanation is that the decade of 2000 includes two recessions that coincidentally bookend the period. A graphical review (Figure B1) of economic growth history using 5, 10, and 15-year rolling periods reflects a common pattern. Thus, the decade of 2000-2009 could be a statistical anomaly.
Trend
Trend is our second scenario. Trends don’t require an explanation to be valid…maybe the reason will be known some day in the future. What are the implications IF 2% is the new trend growth rate?
Stocks are simply financial instruments—a payment today for the right to future cash flows. It sounds hard and cold, yet that’s it. We invest in financial instruments to get a return. The level of return is determined based upon market rates (driven by expected inflation) and the probability of losses. For this discussion, let’s eliminate the impact of a change in inflation and the probability of losses…so it only leaves the future cash flows. For stocks, the future cash flow stream (over the longer-term) is driven by economic growth. Therefore, if economic growth slows, the future cash flows (i.e. dividends from earnings) from stocks also are reduced.
So to get the same level of investment return, an investor must pay a lower initial price for the reduced cash flows to produce the same expected return. What? …to get similar returns, an investor must pay less if there are lower cash flows to make the same return?
Yes. The impact on stock market valuations—if we have down-shifted to 2% real economic growth—is a drop in the average P/E of about 4 points. As a result, the average would decline to 11.5 rather than the historical 15.5 (assuming a repeat of historical inflation cycles). This effect is greater as P/E increases. The natural peak during periods of low inflation would be near 15 rather than the mid-20s.
Few economists, financial analysts, nor this author conclude that this has occurred, yet with the uncertainty of the expected future real economic growth rate, this issue should be better understood.
Reversion
Reversion is our third and final scenario. Hope springs eternal…
Maybe the long-term trend is not lost. This scenario assumes that the factors of economic growth will continue at nearly the same rate: working population growth may not decline due to delayed baby boomer retirements and productivity won’t show a proclivity to fall. As a result, we may be due for a surge in economic growth (typical of post-recession periods) that restores the long term average to average. That would portend a period (maybe a full decade) when quite a few years deliver real economic growth that exceeds the historical average 3% rate (maybe more than 4%, to restore the long-term average to the average).
CONCLUSION
Has the decade of the 2000s been an aberration…thus the long-term trend growth rate (and next decade’s growth rate) for the economy will return to 3%? The implication for P/E is an average near 15.5 and peak near 25…
Has the economic growth rate down-shifted to near 2%…thus the long-term trend growth rate for the economy would be significantly below 3%? The implication for P/E is an average below 11.5 and peak near 15…
Is the decade of the 2000s a coincidental period with two recessions…positioning for an upcoming period for above-average growth that restores the long-term average to average? Since the long-term growth rate of 3% would remain intact, P/E should average 15.5 and peak near 25, yet the psychological impact on the market of such rapid growth could drive a near-term overshooting of the fair value level…
Aqui tenemos un grafico sobre exportaciones a nivel mundial:
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