Stock Market Returns and Slow GDP Growth

Reading through my typical daily research, I came across an interesting chart which stated there is very little relationship between GDP growth of a country & the returns of the stock market. More research led me to several articles on the web which came to the same conclusion – the evidence shows that faster economic growth rates do NOT result in higher equity returns. This can be comforting news as both the US & Europe face a slow economic growth outlook. Message to investors – a slow growth US can still have positive equity returns.

One of the most detailed articles on the subject is in the Financial Times (HERE). They reference research from Goldman Sachs private wealth group. I’ll summarize the article below:

• There is no stable relationship between growth and equity returns. The correlations vacillate between virtually zero and -0.25 for the first 30 years or so and then rise to 0.43 over 42 years only to drop to virtually zero again over 43 years.
• A recent report published by Goldman Sachs Global Economics, Commodities, and Strategy Research also showed that there was no statistically significant relationship between growth conditions and subsequent equity returns (equity valuations, on the other hand, were more significant).
• If one invested in the slowest growing countries during this hundred-year- plus period, the equity returns would have outperformed the fastest growing by 3% a year.
• China’s economy has outgrown that of the US by about 8% a year since the end of 1992. Its equity market, however, has lagged that of the US by about 8% a year. Over the last 15 years, earnings per share growth in China has been -0.9% while that of the S&P 500 has been +5.4% a year.
• Most recently, in 2010, China has outgrown the US by an estimated 7% but the MSCI China Index returned just 4.8%. On the other hand, US equities returned 15.1%.
• Since the peak of US and Chinese equities in October 2007, China has outgrown the US by an estimated 10% a year, but Chinese equities have lagged the US by 2.7% a year.

So, what does matter for stock market returns? Research finds that it is “unanticipated” changes in growth rates, rather than the rates themselves, that are highly correlated with equities returns. In other words, it’s “exceeding expectations” that matters.

Investors would all agree that expectations for US growth are very low right now. What that says to me -> that there is more “potential” to “exceed” those very low expectations; couple that with the above research and it might lead investors to be a bit more optimistic about US Stock Market returns.