Market Analysis

GDP Doesn't Predict Stocks

In this Market Insights video, we discuss the relationship between Gross Domestic Product (GDP) and stocks. Or, more specifically, the lack thereof.

Video Transcript

Hello, and thanks for tuning in. Today, we’ll discuss the relationship between GDP and stocks. Or, more specifically, the lack thereof.

It seems intuitive that stocks in faster-growing economies should do better. A growing economy is good for business, so more growth should be even better, right? Not necessarily. If that were true, Chinese stocks should be near the top of the leaderboard during this global bull market. The whole time, its economy was one of the world’s fastest-growing. Yet Chinese equity markets have fallen more than -20% three times since 2009. In the developed world, Australia’s economic expansion is nearly 26 years old. Yet the MSCI Australia has had 5 bear markets during that span compared to 2 in global markets . This year, Canada’s first quarter GDP growth was the best among G7 countries. However, Canadian stocks are badly lagging developed world stocks year to date.

Are stocks missing something here? Nope! And here’s why: The stock market and the economy aren’t the same thing, so GDP numbers won’t tell you much about what stocks are doing. Consider what GDP attempts to do. It crunches a broad array of data like business investment, trade, personal consumption and government spending all into one number. That number is supposed to give you a high-level sense of what the economy did in the recent past.

Stocks, on the other hand, are slices of company ownership and reflect publicly traded companies. While the broader economic environment does affect stocks, there are narrower factors at work too. For example: What is the outlook for corporate profitability? Is a country’s equity market concentrated in one or two sectors? If so, what’s the outlook for those industries globally? What is the political climate? Is the rule of law respected? How does economic policy impact profitability or investors’ desire to take risks? To use Canada as an example, Canadian stocks skew heavily toward Financials and Energy. Canadian energy firms have been hit hard by the global commodity supply glut, which also impacts Canadian Financials since they lend to the Energy firms . To these stocks, the local economy’s growth rate is a secondary factor.

And most importantly, don’t forget: Stocks are forward-looking as they price in all widely known information. Even the most recent GDP report only tells you what happened in the immediate past, and past performance isn’t indicative of future returns. By the time official number-crunchers unveil GDP data, stocks already moved on.

MarketMinder/Ken Fisher Twitter shout-out was here

Thanks for watching!

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns.