One reason why stock market trading volumes have trended higher is because the cost of trading has come down sharply.
Deustche Bank’s David Bianco included this chart in his 2014 outlook for the stock market.
“Transaction costs related to owning large cap stocks have plummeted in the past few decades and remain low relative to most other assets,” wrote Bianco. “We estimate that the competitive cost of owning a well diversified large cap equity portfolio has declined from about 300bp annually from 1960-1980 to under 1% today. Given that investment costs are tax deductible, we estimate that this decline should justify a 100-150bp reduction in the fair real cost of equity, all other factors the same.”
This is important because the only returns that actually matter to investors are the returns that come after inflation, after taxes, and after transaction costs.
In other news, Bianco recently reiterated his expectation that the S&P 500 would rally to 1,850 in 2014.