DENİZ ÇETİNASLAN 098804

ŞAKİR SEZER 081049

İSMAİL IŞIK 112543

CHAPTER 8

THE IMPACT OF ECONOMIC GROWTH ON MARKET VALUATION

AND THE COMING AGE WAVE

1. Introduction

2. GDP Growth and Stock Returns

3. Economic Growth and Stock Returns

4. Factors that Raise Valuation Ratios

5. The Age Wave

6. Conclusion

Most important macrotrends that influence future stock market returns:economic growth stability of the overall economy the reduction in transaction costs the change in taxes on stock market

income

1. Introduction

The stock market return and real GDP Growth has an negative correlation.

2. GDP Growth and Stock Returns

Negative relation between the growth rates of GDP and the returns to individual countries

The stock prices are the present value of the future dividends, so expectation is that economic growth will increase stock prices. But economic growth affects aggregate earnings and dividends, where stock prices determinants are per share earnings and dividends.

Reason of that?

D= next period’s dividend per shareg=constant rate of future growth of dividends

per sharer=discount rate that investors apply to stockP=price per share

THE GORDON DIVIDEND GROWTH MODEL

This table shows us the summary statistics for dividends per share, earnings per share, and stock returns for the U.S. economy, 1871 through December 2006.

3. Economic Growth and Stock Returns

We have noted that the historical real return on equity has been between 6,5 to 7 percent per year over long

periods and that this has coincided with an average

Price Earning ratio of approximately 15. But there have

been structural changes in the economy in recent

years that may change that ratio.

FACTORS THAT RAISE VALUATION RATIOS

We have shown in Chapter 5 that the reduction in

taxes on equity return due to the reduction in marginal

and capital gains tax rates and inflation have added

more than 2 percentage points to the return over the last

half century. This is essentially more than the increase

in the after-tax return on fixed-income assets.

Factors That Impact Expected Returns

Over the past 200 years the average compound rate of return on stocks in comparison to safe long-term government bonds the equity premium has been between 3 and 3,5 percent.

The Equity Risk Premium

Mr. Mehra Mr. Prescott

The Equity Risk Premium

More Stable Economy

Inflation , tax policy , macroeconomic stability and the drop in transactions costs are important factors influencing the valuation of equities…

The reality is that the United States and the rest of the developed world stand at a precipice…

The Age Wave

Demography Is Destiny

Demographıc trends has threatened social security and medicare programs

Since there are not enough workers earning income , saving would be less and not enough to purchase the assets of retırees whıch they need to fınance their retirement.

Stıll the large volume of bank accounts , bonds and other fixed income securities that must be liquidated to finance retirements of ordinary retires…

The Bankruptcy of Government and Private Pension Systems

Without enough demand and too much supply, asset prices will sink and the long-standing trend to an earlier retirement will be halted dead in its tracks.

When Social Security was passed in 1935, the average retirement age was 69.

That age fell to 67 by 1950, and to 62 today. In 2003, for the first time, more Americans chose the reduced Social Security benefits at age 62 than the full benefit that starts at 65

Reversal of a Century-Long Trend

There is no easy solution. To be sure, rising productivity brings higher income, but it also

brings higher benefits in retirement since benefits are

based on income earned in the last several working

years….

The Global Solution: An Opportunity to Make a Trade

The Global Solution: An Opportunity to Make a Trade

Slow-growing countries, because of their more reasonable valuations, have tended to have higher returns than fast-growing countries.

Higher stock returns follow periods of low price-to-earnings ratios, and lower stock returns follow high price-to-earnings ratios.

The aging of the population is a critical issue impacting financial market returns. We cannot escape from our demographic realities.

CONCLUSION