People always assume there is strong correlation between GDP and stock market. So stock market will perform bad when national GDP is down.
Let’s take a look what exactly is the historical relationship between the stock market and the economy?
On a calendar-year basis since 1930, there’s a only 0.26 correlation between the S&P 500’s total return and the change in real GDP.
So there’s a positive relationship between the stocks and the economy, but it’s not nearly as high as you might think. That leads to some counter-intuitive results at times.
Remember this, stocks tend to be a leading indicator of the economy. That means in years like 2009 when growth was negative, stocks were looking ahead to better growth to come. It also means that in years like 2000, when growth was positive, stocks were looking ahead to weaker growth (recession began in March 2001).
Where this gets complicated is that stock returns are frequently not telling you anything important about the economy, but instead simply reflecting changing investor sentiment.
Hence, the stock market is not equal to GDP (the economy). Understanding that as an investor is critical.
Let’s take a look what exactly is the historical relationship between the stock market and the economy?
On a calendar-year basis since 1930, there’s a only 0.26 correlation between the S&P 500’s total return and the change in real GDP.
So there’s a positive relationship between the stocks and the economy, but it’s not nearly as high as you might think. That leads to some counter-intuitive results at times.
Remember this, stocks tend to be a leading indicator of the economy. That means in years like 2009 when growth was negative, stocks were looking ahead to better growth to come. It also means that in years like 2000, when growth was positive, stocks were looking ahead to weaker growth (recession began in March 2001).
Where this gets complicated is that stock returns are frequently not telling you anything important about the economy, but instead simply reflecting changing investor sentiment.
Hence, the stock market is not equal to GDP (the economy). Understanding that as an investor is critical.
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