Personal Wealth Management / Expert Commentary
Fisher Investments' Founder, Ken Fisher, Debunks: GDP Makes Stocks Grow
Fisher Investments’ founder, Executive Chairman and Co-Chief Investment Officer Ken Fisher debunks the myth that good stock market returns require strong gross domestic product (GDP)—a measurement of a country’s economic output. Ken points out that when comparing historical GDP and stock return data, there isn’t a meaningful correlation. He also stresses that stocks lead the economy—which means waiting for economic data before making your investment decisions may be costly. For example, as bear markets conclude and new bull markets begin, economic recessions often occur while at the same time, stocks are on the rise.
Among other examples, Ken shares that in China—which has seen GDP growth over the past ten years--stocks haven’t emulated this same pattern. If GDP growth were a reliable predictor of stock market growth, Ken says we would have seen strong returns from Chinese stocks over this period.
A man appears on the screen wearing a navy suit, sitting on a chair, behind him is a white screen with the title “Debunkery”
He begins to speak.
Ken Fisher: So, if you really need GDP to make stock market up,
you would think, boy, oh boy, the Chinese stock market has
to have been a really great place to be.
And I wish ten years ago I bought stocks.
Well, if you actually bought stocks ten years ago, the Chinese market is flat to ten years ago.
On the white screen a title appears “DEBUNKERY” with subtitle “Seeing Through Wall Street’s Money-Killing Myths”
Ken Fisher appears back again in the same position.
Ken Fisher: It is easy to see why so many people are fixated on GDP and why so many people falsely believe that you need good GDP to have the stock market do well.
Now, whenever I hear anybody say something like that, you need X to get Y in the stock market, I then ask myself, well, how many data points we got?
Ken Fisher: So, in the time period where we've got really good accurate data for the S&P 500, you got 97 years.
And last I checked, every year has four quarters, and every quarter gets a GDP report.
And therefore, you can check to see, with lags or not, how the stock market's done against GDP reports.
And you know what the correlation coefficient of that is. “0”
Ken Fisher: Now, I've always been a big fan of checking correlation coefficients because there's no there there, that tells you that X doesn't cause Y.
But you can see some more dramatic examples.
Now, mind you, you can always find
examples that confirm your core belief.
You can always find quarters where GDP was strong and the stock market did well.
That doesn't mean that you need strong GDP to make the stock market do well.
Let me just give you two sets of
examples that show that reverse is true.
The stock market is a leading indicator.
So regularly at every bear market bottom, you have the following, which is the beginning of a bull market.
On the white screen, two charts appear.
The charts are showing S&P 500 price index.
The first chart is a bear market in 1990 and the second is a 2008-2009 bear market.
Ken Fisher: And yet in those bull markets, whenever there has been a recession, which is most of
them, the economy keeps getting worse.
And for a long time after the bottom, while the stock market's going through the roof, you follow that? At
the beginning, the stock market goes down with GDP.
After that, the stock market goes
up while GDP is falling.
Let me give you a different, in some ways, more dramatic example, because some people will say, and
I understand the logic here, that, well, maybe not in the short term like the example you just
used around bear market bottoms, Ken.
Maybe instead, in the long term, we need GDP to do well in the long term, or the stock market won't do well.
And again, in my heart, I can feel the beat for that.
But let me make a point.
GDP measures the size of the economy.
Not perfect, but that's what it's all about.
I mean, there are no constructed indexes of things like that that measure precisely.
That's a different topic.
But generally, GDP is a measure
of the size of the economy.
Ken Fisher: And so, economies that grow more have GDP going up more, and economies that shrink have GDP falling, and GDP as a calculation isn't that bad.
So, what economy do we all know about that's grown one heck of a lot in recent decades?
Grown a lot more than the United
States has, might be, maybe China?
Can you think of a big economy that's grown more than China over the last decade? So, if you really need GDP to make stock market up, you would think, boy, oh boy, the Chinese stock market has to have been a really great place to be.
And I wish ten years ago I bought stocks.
On the screen another chart appears, this chart is showing China GDP and MSCI China Returns over the past 10 years.
Ken Fisher: Well, if you actually bought stocks ten years ago, the Chinese market is flat to ten years ago, Flat! To five years ago, it's negative now, mind you, the US market and the world market are both hugely positive over those times.
I want to reiterate last five
years, Chinese stock markets negative. Last ten years, Chinese stock markets flat.
There must be something else going on besides GDP.
You follow that?
And I'm not suggesting that GDP growing is a bad thing, it's a good thing.
It's a good thing for people, and it may or may not contribute to a given stock market movement.
Ken Fisher: But when I was young and took econ in school, heaven forbid, they taught you to think a little like a scientist does, because it's a social science that you're supposed to see how things work, If you vary one variable and hold everything else constant, otherwise known as other things equal, or in Latin, as I learned it at the time, ceteris paribus.
The fact is, in the real world, that never happens.
In the real world, everything is dynamic.
And if one thing moves, just the movement of that one thing impacts something else.
Ken Fisher: So, what goes on? Well, as I wrote about in my Only Three Questions book at great length, and as I also wrote about in Debunkery,
where this is coming from and this discussion, where I use China as an example, but that was some years back, and we didn't have these last ten years.
The fact is that supply in the
long term is the singularly most important, powerful thing in determining pricing.
Pricing comes from shifts in demand and supply and shifts in supply in the long term are more powerful than shifts in demand, because shifts in demand, as I explained in The Only Few Questions, comes in a more finite bandwidth than shifts in supply.
Ken Fisher: Shifts in supply can always overwhelm demand, which had been the case in China on the one hand.
And on the other hand, despite the growth in recent years, China has increasingly become restrictive in its
liberties and its freedom, which has hurt sentiment, and so, the market hasn't done so well.
There's always multiple variables going on all at one time, and GDP alone is just one of them.
Growth in the economy is just one of them.
And in that, what I want you to see is that the notion now that GDP growth may not be so strong is in and of itself telling you nothing about where the stock market is going to go in the next six months.
The fact of the matter is there's all these other variables, they all play together, and it is only one
piece, and it's far from the most important.
Ken Fisher: I believe in the months ahead, you will continue to hear discussions about GDP, and I want you to remember that that's one, and not so terribly important overall.
Thank you very much for listening to me.
A half white half red screen appears.
Ken Fisher: I very much hope you enjoyed this video as part of my series on debunking common market myths.
To watch more videos like this, click the link on the screen and make sure to subscribe to Fisher Investments YouTube channel.
Thanks so much for listening to me.
Ken Fisher finished talking, and
A series of disclosures appears on screen: “Investing is Securities involves a risk of loss. Past performance is never a guarantee of future returns. Investing in foreign stock markets involves additional risks, such as the risk of currency fluctuations. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized investment advice or a reflection of the performance of fisher investment or its clients. Nothing herein is intended to be a recommendation or a forecast of market conditions. Rather it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. Not all past forecasts were, nor future forecasts may be, as accurate as those predicted herein.
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