Stock Markets vs. The Real Economy

In Saturday’s Globe and Mail, Brian Milner summarized Vitaliy Katsenelson’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 Stanford’s classic Paper Boom.


  • I am amazed at how reluctant financial writers are to support stocks after a downturn. They seem to prefer the fever of a long bull market for their buy signals.

    There was a very good reason for poor markets from 1966 to 1982. Interest rates and inflation went through the roof. While they may rise in the future, I don’t think anyone sees a return to those bad old days.

    Right now appears to be a great time to buy. In many years of investing, I’ve never seen so many solid companies look so cheap.

  • The amount of people I see who call themselves “long-term investors” but bail at the first sign of trouble is truly staggering, or who say things like “oil is higher than it has ever been, I need in” is mind-blowing. One of my stocks dropped and rose about $2 (its normal value is around $10.60) on week where as far as I can tell there were no press releases, analyst reports or other negative information reaching the market. To a huge degree the market is about emotion, it never ceases to amaze me.

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