Stock Markets vs. The Real Economy
In Saturdayâ€™s Globe and Mail, Brian Milner summarized Vitaliy Katsenelsonâ€™s historical analysis of American stock markets. He distinguishes “bull markets” from “range-bound markets”:
. . . growth patterns may be similar. What separates the two are stock valuations, which soar to such unrealistic heights during raging bull periods that it takes years for them to come back down to normal levels.
However, what strikes me about the accompanying table is not that economic growth and stock-market performance are unrelated, but that they appear to be inversely related. During bull-markets years, when the S&P 500 averaged 15.2%, Gross Domestic Product (GDP) averaged 6.4% in nominal terms and 3.9% in real terms. During range-bound years, when the S&P 500 averaged only 7.3%, GDP averaged 9.4% in nominal terms and 4.0% in real terms.
Of course, correlation does not necessarily prove causation. At a minimum, though, these figures provide another piece of evidence supporting the thesis of Jim Stanfordâ€™s classic Paper Boom.