How the Wealth Was Won: Factor Shares as Market Fundamentals

Abstract

Why does the stock market rise and fall? From 1989 to 2017, the real per-capita value of corporate equity increased at a 7.2% annual rate. We estimate that 40% of this increase was attributable to a reallocation of rewards to shareholders in a decelerating economy, primarily at the expense of labor compensation. Economic growth accounted for just 25% of the increase, followed by a lower risk price (21%), and lower interest rates (14%). The period 1952 to 1988 experienced only one third as much growth in market equity, but economic growth accounted for more than 100% of it.