CHART OF THE DAY: The Stock Market Is Not The Economy Anywhere In The World
The stock market and the economy are not the same thing.
They may be related, but their growth rates differ because they are based on and driven by very different things.
"It is not unreasonable for an investor to associate rapid economic growth with strong stock market returns," write Vanguard's Joseph Davis, Roger Aliaga-Diaz, Charles Thomas, and Ravi Tolani. "And anyone who regularly follows the financial markets probably has the sense that economic data releases can drive market performance."
In a report titled "The Outlook For Emerging Market Stocks In A Lower-Growth World," the authors examined long-run equity market returns and real GDP growth for 46 countries and found the correlation to be very weak and inconsistent.
"At 4.0% per year, the average real equity market return for the countries with the three highest GDP growth rates was slightly below the 4.2% average return for the countries with the three lowest GDP growth rates, despite the considerable difference in those rates (8.0% a year versus 1.6%, on average)," they found. "It is clear that the correlation between these two variables is weak."
"These results may not quite line up with investor intuition," they write.
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