Seriously, why does the market as a whole go up?

[whiterose]

The time value of money is your answer.

 

Ok, makes sense.

But does it imply that over the last 100 years the time value of money was 7-10%? Weren't sovereign long-term bonds yields on average much lower as a benchmark? Is the spread (equity risk premium) entirely due to credit risk and a volatility premium?

Isn't the overall long-term credit-risk in the US equity market quite low or even non-existent looking back?

Yes, population growth/decline should be reflected in g.

[petec]

Ha - credit risk in the US equity market might be non-existent looking back, but securities aren't priced looking back, and there is always plenty to worry about looking forward.  If you are 100% confident that the future will look like the past, and you're happy to accept (say) a 5% return, then you'd pay a lot more for the equity market in aggregate than I would.

 

Also the market, in aggregate, is not really priced by investors.  It is much more the case that individual stocks are.  And there's *plenty* to worry about with each of those.

 

So yes, if you assume that investors correctly estimated cash flows for 100+ years the implication is that the discount rate was c. 7% for equities, which includes a risk free rate and an equity risk premium.  (I believe that long term return number also includes inflation.)  The reason that the market goes up over time is that every year you get one year closer to your cash flows, so you can dispense with a year's worth of discounting.

[rkbabang]

Seriously, why does the market as a whole go up?

 

Same thing that makes it go down as a whole.

 

Animal spirits.

 

Fear & Greed.

 

I think the question is about the long term upward trend, not the short term ups and downs.  In the short term those reasons you listed drive the market back and forth, but over the long term it has only gone up.  My opinion is that the long term upward climb, has been due to population growth (people are the ultimate resource) as well as increases in productivity, wealth creation, technology, transportation, trade, etc.

 

Population is not going to increase at the same rates as in the past (as has been mentioned by others above), but hopefully increases productivity, wealth creation, and technology of all types (weak AI, then strong AI, nanotech, etc) will partially or even completely compensate for the that lack of new people.  Maybe, maybe not, I don't know.  But even if 7-10% long term growth becomes 2-4% long term growth, I do think the market will continue to grow long term not shrink.

 

[Jurgis]

PV0 won't be the same as PV1 even if growth ceases at some point in the future.

 

Ok that's true, but shouldn't then P1 be discounted again to P0?

According to an admittedly simplified Dividend Growth Model:

P0 = D1/(r-g) ~ (D2/(r-g))/r ?

 

The point is, could the market in the 1960s e.g. had predicted current earnings from 2016 and then discounted them correctly. It would be cool to have 40y rolling eps predictions to see the possibly permanent underrating of g or overrating of r.

 

I think you are still confused.

 

Even if market correctly predicts and discounts all the growth and earnings, the value at year zero (e.g. 1960) is different from value at year 1 (e.g. 1961). For some reason you keep thinking that if you make perfect predictions, then value doesn't change as time passes. However, it does.

 

Play around with DCF calculator (this for example http://moneychimp.com/articles/valuation/dcf.htm ). Write your own. Maybe that will convince you that what I say is true. :)

 

E.g. plug in into DCF calculator, FCF of 1, the growth of 5%, discount rate of whatever, 30 years of growth, then no growth. That gives you the value of security - in your case the whole market - at year zero.

 

Then plug in into DCF calculator FCF of 1.05 (it grew 5% as you predicted), same discount rate, 29 years of growth, then no growth. That gives you the value of security at year one.

 

Have fun

 

 

[SharperDingaan]

This is maybe a naive and possibly a philosophical question, but please hear me out:

I was wondering, why the market as such, let's say the S&P500 is expected to rise x% per year and even has been historically (7-10%) over long periods of time.

 

If one would assume, in an ideal world, stocks are (fairly) valued, based on discounting all of the real future cashflows, shouldn't the inflation adjusted price be essentially flat over time? It can only rise if there are some not yet discovered/materialised profits on the way (for now irrelevant to where they come from). Is it because investors as a group structurally underestimate positive surprises in growth/innovation/efficiency-gains?

 

I would like your thoughts on the matter, maybe I am missing something. Thanks!

 

It's much more basic, & primarily demographic.

 

We know from supply/demand that as long as there is 'excess demand' price will go up. We can get that excess by raising the number of buyers, getting them to spend more, or cutting back the supply. The average person spends far more in their 30's through 50's (kids, house, etc.) than they do in their 20's & their retirement. Folks in their mid 50's to mid 60's are generally anomalies as spending is more influenced by saving for retirement,  retirement packages, and 'crossing things off the bucket list' - before they retire. On top of this is annual inflation and growth, which may or may not be positive.

 

NA markets are primarily influenced by the baby boom - their peak is entering their mid 50's, but the early boomers are retiring - in growing numbers. Hence the current flow of new saving $ (excess demand) into the market is about as good as it's going to get. As aging continues we really need inflation & growth to offset lower net contributions - & retirees starting to sell down to fund their retirements.

 

Japan has very few young people, & their economy reflects it, same thing for big parts of Europe. It's also hard to 'make' inflation when there are annual declines in the underlying buying need (growing numbers of retirees), and growth when there are few folks to man the factory. You can import labour (Germany), but at some point it's easier to just move the factory to the labour.

 

In any given quarter a particular NA sector may outperform, but it may not be sustainable.

 

SD       

 

[petec]

PV0 won't be the same as PV1 even if growth ceases at some point in the future.

 

Ok that's true, but shouldn't then P1 be discounted again to P0?

According to an admittedly simplified Dividend Growth Model:

P0 = D1/(r-g) ~ (D2/(r-g))/r ?

 

The point is, could the market in the 1960s e.g. had predicted current earnings from 2016 and then discounted them correctly. It would be cool to have 40y rolling eps predictions to see the possibly permanent underrating of g or overrating of r.

 

I think you are still confused.

 

Even if market correctly predicts and discounts all the growth and earnings, the value at year zero (e.g. 1960) is different from value at year 1 (e.g. 1961). For some reason you keep thinking that if you make perfect predictions, then value doesn't change as time passes. However, it does.

 

Play around with DCF calculator (this for example http://moneychimp.com/articles/valuation/dcf.htm ). Write your own. Maybe that will convince you that what I say is true. :)

 

E.g. plug in into DCF calculator, FCF of 1, the growth of 5%, discount rate of whatever, 30 years of growth, then no growth. That gives you the value of security - in your case the whole market - at year zero.

 

Then plug in into DCF calculator FCF of 1.05 (it grew 5% as you predicted), same discount rate, 29 years of growth, then no growth. That gives you the value of security at year one.

 

Have fun

 

+1

[TwoCitiesCapital]

This is maybe a naive and possibly a philosophical question, but please hear me out:

I was wondering, why the market as such, let's say the S&P500 is expected to rise x% per year and even has been historically (7-10%) over long periods of time.

 

If one would assume, in an ideal world, stocks are (fairly) valued, based on discounting all of the real future cashflows, shouldn't the inflation adjusted price be essentially flat over time? It can only rise if there are some not yet discovered/materialised profits on the way (for now irrelevant to where they come from). Is it because investors as a group structurally underestimate positive surprises in growth/innovation/efficiency-gains?

 

I would like your thoughts on the matter, maybe I am missing something. Thanks!

 

It's much more basic, & primarily demographic.

 

We know from supply/demand that as long as there is 'excess demand' price will go up. We can get that excess by raising the number of buyers, getting them to spend more, or cutting back the supply. The average person spends far more in their 30's through 50's (kids, house, etc.) than they do in their 20's & their retirement. Folks in their mid 50's to mid 60's are generally anomalies as spending is more influenced by saving for retirement,  retirement packages, and 'crossing things off the bucket list' - before they retire. On top of this is annual inflation and growth, which may or may not be positive.

 

NA markets are primarily influenced by the baby boom - their peak is entering their mid 50's, but the early boomers are retiring - in growing numbers. Hence the current flow of new saving $ (excess demand) into the market is about as good as it's going to get. As aging continues we really need inflation & growth to offset lower net contributions - & retirees starting to sell down to fund their retirements.

 

Japan has very few young people, & their economy reflects it, same thing for big parts of Europe. It's also hard to 'make' inflation when there are annual declines in the underlying buying need (growing numbers of retirees), and growth when there are few folks to man the factory. You can import labour (Germany), but at some point it's easier to just move the factory to the labour.

 

In any given quarter a particular NA sector may outperform, but it may not be sustainable.

 

SD     

 

+1 Demographics is a HUGE driver of investment returns.

 

Further, index construction creates a secular upwards bias as indices are regularly reconstituted with the survivors/winners and the dropping of losers while not actually having to come up with the capital to make these adjustments (i.e. selling losers typically means you can buy very little of the winners, but indices can make these adjustments however large they wants as they're only constrained by making denominator adjustments to keep the price the same).

 

If you're regularly dropping the losers and acquiring the winners, and unconstrained by capital limitations that most of us have, you will generally rise in nominal value.

[scorpioncapital]

Well if a stock trades at 10x earnings and has an above average growth rate, if you strip out inflation and the growth itself, the only thing that remains is investors' placing a higher multiple on the same earning stream - say 20x... And vice versa when growth slows or goes negative (if the ratio is currently high from a previous period of high growth). Thus expectations about growth by the investing community, not particularly quantifiable in a scientific way, is what causes growth in share prices outside of the two variables you mentioned. About the only thing you can usually say is that higher than normal growth commands a higher multiple than normal growth, if you knew what the central expectation was and if that expectation was itself correct based on inflation expectations. That word again, expectations. It's why markets can be so precarious. It's not a cold hard fact. I think it also explains why managements that actively try to unlock value in a pragmatic way are valued highly because outside of this, you really have very little control.

 

 

[vox]

I have a hypothesis that's not been mentioned yet. As Jurgis and others have pointed out, positive stock market returns are generated when the return on invested capital exceeds the cost of equity.

 

Management teams get to set public expectations of earnings by giving guidance in advance and internal expectations through a budget/ strategic plan. It's been empirically demonstrated that actual earnings are much more likely to match or exceed management forecast than to fall short. I think that there are three explanations for that phenomenon, 1. earnings manipulation, 2. management being conservative in their estimate, and 3. employees try harder when they are on the cusp of achieving their goal (especially if financially incentivized). I think the latter two reasons can explain why earnings 'surprises' can on aggregate be positive and sustainable.

[cmlber]

I have a hypothesis that's not been mentioned yet. As Jurgis and others have pointed out, positive stock market returns are generated when the return on invested capital exceeds the cost of equity.

 

You're making this question a lot more difficult than it needs to be.

 

If the market projects the cash flows of a business will be $0 for 364 days and $107 on the 365th day, and $0 thereafter, the present value of that business at t=0 is $100 using a 7% discount rate.  In 1 year you'll have $107 in cash if the markets projection is correct.  Your return will be 7% even though the market accurately predicted the cash flows. 

 

[vox]

I have a hypothesis that's not been mentioned yet. As Jurgis and others have pointed out, positive stock market returns are generated when the return on invested capital exceeds the cost of equity.

 

You're making this question a lot more difficult than it needs to be.

 

If the market projects the cash flows of a business will be $0 for 364 days and $107 on the 365th day, and $0 thereafter, the present value of that business at t=0 is $100 using a 7% discount rate.  In 1 year you'll have $107 in cash if the markets projection is correct.  Your return will be 7% even though the market accurately predicted the cash flows.

 

I got that, I'm just speculating on another possible reason - a systemic bias towards positive earnings surprises.

[Sionnach]

I have a hypothesis that's not been mentioned yet. As Jurgis and others have pointed out, positive stock market returns are generated when the return on invested capital exceeds the cost of equity.

 

You're making this question a lot more difficult than it needs to be.

 

If the market projects the cash flows of a business will be $0 for 364 days and $107 on the 365th day, and $0 thereafter, the present value of that business at t=0 is $100 using a 7% discount rate.  In 1 year you'll have $107 in cash if the markets projection is correct.  Your return will be 7% even though the market accurately predicted the cash flows.

 

I absolutely agree

 

I think the answers talking about demographics etc. are missing the point of the question. Demographic growth would be factored into the stock price in the form of future cash flow growth. The question is asking why do stocks go up even with all future expectations factored in? The reason is because those future cash flows are discounted at a rate greater than inflation

[whiterose]

Yes, thanks again for the clarification.

[bonkers]

I think one must clearly separate two things:

 

1) The growth of fundamental value

2) How that value is discounted to present, resulting in equity returns over time

 

These two might have other elements affecting both (like population growth, savings, amount of money,  interest rates, inflation, etc.), but they are separate.

 

As the economy grows, companies invest and grow their total earning power. So the "world economy" gets more valuable over time, assuming no change in profit margins (or return on capital). Only the part of the economy that is stock exchange listed shows in total market value, but let's assume this stays constant as well.

 

During the last century U.S. stock market returns have been very close to real earnings growth + equity-holder yield (+ inflation).

 

Surely, if one could have 20:20 vision of the future, it would make sense for the long-term investors to discount this future value to present with a rate somehow resembling the available alternatives, like the gov. bond rate. But human vision is not 20:20. Few have eternal investment horizons. Human nature with fear and greed has always made the stock market rather volatile.

 

It seems that in order to assume this risk, people have traditionally required a return very much resembling the one stated above. In the short term market prices (and returns) gyrate wildly up and down, but investors end up getting the long-term fundamental return over many, many years (only) as we go along.

[Uccmal]

The question reads: .why does the market as a whole go up, not: why do one geoup of stocks or another go up. 

 

The most basic answer reflected here by myself and others is that markets may not always go up 7-10% due to demographics and social changes.  There were several one offs in the 20th century that may not be duplicable in the future: reduction in infant mortality, electrification, the rise of consumerism and individualism, the rise of suburbia, the automobile.  There will be advances in the future but will they result in greater profits or less - one could argue that there may be a race to the bottom and loss off unregulated profits - Amazon.com being the prime (sorry :-) example  of this trend. 

 

The bond markets are several times the size of stock markets, and they are telling us that deflation is happening. They are also telling us that near  term economic growth and profit growth (5-10 years) is going to be non existent.  And they are also telling us that there is nothing governments can do about it.  It is part of a long term cycle or pattern and nothing will have any effect on it.  I dont think it is likely that markets maintain their 20th century growth rates in this climate.  To my mind some stock markets are ahead of themselves and due at least for a 20 % correction, but this is nothing new. 

[TwoCitiesCapital]

The question reads: .why does the market as a whole go up, not: why do one geoup of stocks or another go up. 

 

The most basic answer reflected here by myself and others is that markets may not always go up 7-10% due to demographics and social changes.  There were several one offs in the 20th century that may not be duplicable in the future: reduction in infant mortality, electrification, the rise of consumerism and individualism, the rise of suburbia, the automobile.  There will be advances in the future but will they result in greater profits or less - one could argue that there may be a race to the bottom and loss off unregulated profits - Amazon.com being the prime (sorry :-) example  of this trend. 

 

The bond markets are several times the size of stock markets, and they are telling us that deflation is happening. They are also telling us that near  term economic growth and profit growth (5-10 years) is going to be non existent.  And they are also telling us that there is nothing governments can do about it.  It is part of a long term cycle or pattern and nothing will have any effect on it.  I dont think it is likely that markets maintain their 20th century growth rates in this climate.  To my mind some stock markets are ahead of themselves and due at least for a 20 % correction, but this is nothing new.

 

+1 

 

Not to derail the thread, but we spend so much of out time focused on equities. Interest rates drive the world. The worlds bond markets are so much deeper than the stock market. If bonds are shouting a warning, we have to be very, very careful before we determine that hundreds of trillions of dollars is wrong just because it takes SO much to move those markets.

 

 

 

[DonFanucci]

But how can you take lessons from the bond market given the unprecedented distortion by central banks?

[Uccmal]

But how can you take lessons from the bond market given the unprecedented distortion by central banks?

 

I think we, collectively,  are confusing cause and effect.  The stimulus programs are a blunt instrument response to the slowing of the economy.  The slowing of the economy started long ago in relation to the aging demographic.  Because of all the noise from the tech run up, the twin towers and the war afterwards, the pre-2008 China expansion, and the financial deregulation crisis, we didn't see the slowdown happening.  It started in Japan, and Europe, in the 1990s, and moved on to include North America, and parts of Asia.  It has now moved into the rest of Asia, and is now encompassing the bulk of the worlds GDP. 

 

The governments and central banks are only reacting.  There is really nothing they can do.  Japan has shown what the long term will look like.  Interest rates will settle at the lowest they have ever been.  Governments will continue to try and fight deflation.  The next thing they will attempt is infrastructure programs.  Since the demographic tap has been shut off forever it is an entirely new paradigm for the world.  The future is one of much slower economic growth than the past.  The major markets have barely made positive territory in the last 15 years. 

 

It is not all bad though.  I have been investing for 20+ years, during the slowdown, and have done very well. 

[SharperDingaan]

But how can you take lessons from the bond market given the unprecedented distortion by central banks?

 

I think we, collectively,  are confusing cause and effect.  The stimulus programs are a blunt instrument response to the slowing of the economy.  The slowing of the economy started long ago in relation to the aging demographic.  Because of all the noise from the tech run up, the twin towers and the war afterwards, the pre-2008 China expansion, and the financial deregulation crisis, we didn't see the slowdown happening.  It started in Japan, and Europe, in the 1990s, and moved on to include North America, and parts of Asia.  It has now moved into the rest of Asia, and is now encompassing the bulk of the worlds GDP. 

 

The governments and central banks are only reacting.  There is really nothing they can do.  Japan has shown what the long term will look like.  Interest rates will settle at the lowest they have ever been.  Governments will continue to try and fight deflation.  The next thing they will attempt is infrastructure programs.  Since the demographic tap has been shut off forever it is an entirely new paradigm for the world.  The future is one of much slower economic growth than the past.  The major markets have barely made positive territory in the last 15 years. 

 

It is not all bad though.  I have been investing for 20+ years, during the slowdown, and have done very well.

 

+1

 

It's useful to take a page from nature, and recognize that nothing grows forever; everything eventually either runs out of nutrients, or dies from its own pollution. Yeast in a sugar solution (grape juice, malt, etc.) comes to mind.

 

The fuel for all economies is demand (buying power); lots of people, with ability to pay. The people side is driven by demographics, ability to pay is driven by monetary and fiscal policy. If you don't have the people you need mass immigration, the immigrants need to be of child bearing age, and they have to be able to establish once they reach your shores. It also means you have to recognise that your home culture is going to change, and that it's a very healthy thing.

 

Canada's iconic dress 'Mountie' used to only be male, 6' 1" or taller, and wore a Stetson. Today, he (or she) is a lot shorter, also wears a turban or a hijab - and is frankly just as good, if not better. Cultural change is part of life.

 

SD

 

 

 

 

   

 

[Guest longinvestor]

But how can you take lessons from the bond market given the unprecedented distortion by central banks?

 

I think we, collectively,  are confusing cause and effect.  The stimulus programs are a blunt instrument response to the slowing of the economy.  The slowing of the economy started long ago in relation to the aging demographic.  Because of all the noise from the tech run up, the twin towers and the war afterwards, the pre-2008 China expansion, and the financial deregulation crisis, we didn't see the slowdown happening.  It started in Japan, and Europe, in the 1990s, and moved on to include North America, and parts of Asia.  It has now moved into the rest of Asia, and is now encompassing the bulk of the worlds GDP. 

 

The governments and central banks are only reacting.  There is really nothing they can do.  Japan has shown what the long term will look like.  Interest rates will settle at the lowest they have ever been.  Governments will continue to try and fight deflation.  The next thing they will attempt is infrastructure programs.  Since the demographic tap has been shut off forever it is an entirely new paradigm for the world.  The future is one of much slower economic growth than the past.  The major markets have barely made positive territory in the last 15 years. 

 

It is not all bad though.  I have been investing for 20+ years, during the slowdown, and have done very well.

 

+1

 

A nightmarish scenario would be prolonged war that engages the working ages in destructive versus productive effort. Slow growth stands to become even slower. Not the end of the world, here is a look at growth rates over the past 1000 years

 

https://ourworldindata.org/gdp-growth-over-the-last-centuries/ 

 

[Vish_ram]

Markets at a given point in time price in all known factors like population growth, gdp growth, inflation, productivity, confidence in govt. , expectations about rule of law etc into the stock. The stock is then valued with a given expected return (risk premium). If above mentioned factors are constant, then your actual return = expected return.

 

If any of these factors change, say if inflation comes in higher than priced in, then future expected return falls and markets fall. Inflation comes in the denominator in P/E equation. When Volcker jacked up the rates, future inflation expectations were falling down and P/E went up and market went up.

 

There are so many other factors that the markets will fail to price in

1) the pace of technological changes

2) globalization and impact of BPO, offshoring, cheap labor coming in, trade agreements etc

3) clout of lobbyists and enactments of laws favoring big companies: tax laws that result in companies like GE paying <0%, labor laws that favor big companies, laws that reduce power of unions (right to work), etc

 

The above 1-3 have generally favored S&P 500 companies in a big way.

 

Despite lower GDP growth, deflation, global slowdown the markets have managed to perform better due to ultra low interest rates (borrowing driven stock buyback, dividends, LBO etc).

 

[Uccmal]

Markets at a given point in time price in all known factors like population growth, gdp growth, inflation, productivity, confidence in govt. , expectations about rule of law etc into the stock. The stock is then valued with a given expected return (risk premium). If above mentioned factors are constant, then your actual return = expected return.

 

If any of these factors change, say if inflation comes in higher than priced in, then future expected return falls and markets fall. Inflation comes in the denominator in P/E equation. When Volcker jacked up the rates, future inflation expectations were falling down and P/E went up and market went up.

 

There are so many other factors that the markets will fail to price in

1) the pace of technological changes

2) globalization and impact of BPO, offshoring, cheap labor coming in, trade agreements etc

3) clout of lobbyists and enactments of laws favoring big companies: tax laws that result in companies like GE paying <0%, labor laws that favor big companies, laws that reduce power of unions (right to work), etc

 

The above 1-3 have generally favored S&P 500 companies in a big way.

 

Despite lower GDP growth, deflation, global slowdown the markets have managed to perform better due to ultra low interest rates (borrowing driven stock buyback, dividends, LBO etc).

 

Yes, and excepting #1 the rest of the things you list have already happened.  Number 1 may now cause a race to the bottom.  I think Amazon.com is the leading indicator of how that will play out.  I am sure that deflation is something Jeff Bezos and his competition are very aware of, and for which they have no answer.  Its like Buffett's parade watchers.  The moment Amazon or its suppliers let up the throttle on bringing prices down, someone else will willingly take up the slack. 

[LC]

While population growth and access to a higher quality of life will slow, technology will continue to improve and create economic growth (in my view, of course)

[Graham Osborn]

I am not entirely sure what you are getting at.  The assumptions in all the other answers are missing the real reason markets go up: Rising population.  At some point in our lifetimes populations are going to stabilize or even shrink.  Markets will no longer rise as rapidly as they have in the past once that happens.  Japan is your leading indicator for this scenario. 

 

There will be some growth due to technology advance, but no inflation, and the 7-10% growth of the past will never be seen again.  But without inflation, lesser returns will be acceptable.  I actually think alot of the world is starting to exhibit slower growth due to slowing population growth now.  I think this is partly why all this ammo (QE) cant juice the major world economies the way it would have in the past. 

 

Governments, business, and investors are in denial: This time it really is different.

 

I agree.  If you look at the S&P, the value has increased because of:

 

1) Observation bias.  The largest companies which qualify have gotten larger due to globalization heavily aided by technology/ consolidation.

 

2) The EV/ Rev denominator/ GDP/ population growth.  No one could have foreseen that the US would enjoy the kind of GDP growth we have enjoyed 100 years ago.  NOONE.  Suppose Hitler had developed the nuclear bomb first?

 

3) The EV/ Rev numerator/ MC.  There have been organic (tech/ globalization at unprecedented scale, a perception of greater political stability which lowers the discount rate) and inorganic (artificially low interest rate/ QE) reasons for this.  Contrary to some, I believe #3 is more a kinetic that steady-state effect.

 

Americans think that markets go up indefinitely because they've never seen anything different in their lifetimes or those of their indigent parents/ grandparents.  In other words, they have *unconcious* optimism.  People think that Buffett and Lynch returns are a function of the person rather than the investment opportunities - idiots.  Could Buffett or Lynch achieve their historical results today?  Absolutely not.

 

Oh yeah, and I forgot the most important one:

 

4) RAMPANT INFLATION.  The long bond markets should get interesting when folks figure that one out ;).  If you don't know what I'm talking about, visit the S&P/ Gold thread.

[Guest Schwab711]

Let r = risk-free rate

Let E(i) = expected return of some investment, i (some index)

Let m = expected market return ("E(m)")

Let b = beta = 1

Let the reference investor = American

 

Theory: the stock market has negative expected returns ("E(i)")

 

Assume: 1) r = 10y UST; 2) "market" is ~= to your index investment;

We know: ERP = b*(m - r)

 

If i = m then

 

If E(i) < 0  =>

Then E(i) = r + b * (m - r) < 0  =>

r + ERP < 0

 

Thus the market has negative E(i) when the risk free rate plus the ERP is negative. Doesn't mean markets have to go up, but they tend to.