What makes the stock market move over the long term? While stocks have historically delivered positive returns year-over-year on average, it is not clear why stock prices rise more rapidly in one period than in any other.
With my colleagues, Martin Lettau of the U.C. Berkeley Haas School of Business and Sydney Ludvigson of New York University, I set out to investigate what makes stocks move over time. What we found was surprising.
Despite the widespread belief that firm productivity is a key driver of stock market returns, our results indicate that fluctuations in productivity play only a small role. Far more influential over long periods is the economic redistribution between workers and shareholders — meaning how a company’s profits are divided between employees and investors.
Our first step in this research was to consider which factors might be responsible for movement in the stock market in aggregate. Each firm that is represented in the stock market index produces a stream of revenues. After paying a portion to workers, the rest is left over as profits that can be distributed to shareholders as dividends. The stock price will rise whenever the rewards to the shareholders increase, which can be caused by one of three separate forces:
Productivity: The firm becomes more productive, increasing its stream of revenues. This increases the size of both slices, including the shareholders’ slice.
Redistribution: The size of the pie remains fixed, but the firm pays a smaller share to the workers, increasing the shareholders’ slice.
Market confidence: Neither the size nor the division of the pie changes, but more risk-tolerant investors demand more stock despite there being no change in their current dividends.
Next month the new rules of the Securities and Exchange Commission (SEC) will become effective for money market funds (MM funds).
Most importantly, MM funds with any assets from institutional shareholders – e.g., corporations, pension plans and insurance companies – will no longer maintain a constant net asset value per share of $1. Instead, the net asset value of institutional MM funds will fluctuate on a daily basis – for example, 99.8 cents per share on one day, and $1.01 per share on the next.
The new SEC rules apply to institutional MM funds investing in short-term debt of cities and states – called “municipal” MM funds. The new rules also apply to institutional MM funds investing primarily in short-term debt of banks and top-rated companies – called “prime” MM funds.
Thomas Kochan, Co-director, MIT Institute for Work and Employment Research
According to the World Commission on Environment and Development, a “sustainable” economy must meet the needs of the present while not compromising the ability of future generations to meet their needs. By this standard, the American economy is definitely unsustainable: It is not creating enough jobs to meet the current or future population’s needs and the long term trend in job quality is destined to produce a declining standard of living for today and tomorrow’s workers.
June’s dismal unemployment numbers are just the latest indicators. The economy created only 18,000 new jobs (about 130,000 less than needed just to keep up with the growth in the labor force) and unemployment rose to 9.2%. Moreover, hourly wages over the past year lagged increases in prices by 1.5%.
These numbers, coming on the back of an equally bad report last month make it painfully obvious that the nation needs a new, aggressive, and comprehensive employment strategy, one that creates jobs directly and successfully engages business and labor in efforts to build a sustainable recovery and economic future. Read More »