The Map and the Territory by Alan Greenspan — FOUR | STOCK PRICES AND EQUITY STIMULUS

1. 1. The S&P 500 has averaged nominal annual gains of nearly 7% from WWII through 2007, and almost never failed to log gains over any ten-year period.
2. 2. Stock prices rise persistently because earnings per share grow with nominal GDP, which is driven by labor force, productivity, and inflation.
3. 3. Mechanical trading strategies based on equity risk premiums outperform intuitive trading because fear biases human judgment.
4. 4. Fear can override rational investment behavior even in seasoned investors, as seen during the 1987 crash when many sold near the bottom.
5. 5. The degree of fear and euphoria in markets is measurable by yield spreads on credit risk and maturity, and by equity risk premiums.
6. 6. Small investors are more risk-averse because losing their stake means they are out of business, while large investors can absorb losses and buy during crashes.
7. 7. Approximately 2.1 cents of every dollar in household stock equity, 3.0 cents of home equity, and 2.0 cents of other assets are spent on consumption annually.
8. 8. Analysts traditionally measured savings only as a percent of income, but net worth changes also significantly drive consumption.
9. 9. Homebuilding is not significantly affected by stock prices, except possibly the stock price of a homebuilder's own company.
10. 10. A 10% increase in the market value of household assets (stocks, bonds, home equity) is associated with a 1.3 percentage point annual change in real GDP.
11. 11. Equity stimulus from stocks and homes has averaged a net annual gain of 7.5% since 1952, functioning similarly to fiscal stimulus but driven by private decisions.
12. 12. Corporate executives do not explicitly cite stock prices when approving capital projects, but data show stock prices are an important determinant of capital spending.