S&P500 Return Compared to GDP Growth

Some economists would have you believe that stock markets should match economic growth to be in equilibrium with the economy. This argument is flawed as the stock market composition usually does not accurately reflect the sector mix of the economy. In fact, the U.S. stock market has always outperformed GDP growth.

As we come to the end of the second decade of the twenty-first century,  amid the greatest economic collapse since the Great Depression, it is instructive to review the U.S. stock market performance on a decade-by-decade basis and to compare it to economic growth.

Although the last decade has proven to be one of the worst periods for GDP growth in the last ninety years, this sluggish growth was no restraint on the stock market.  In direct contrast, the S&P500 outperformed the economy more in the last decade, than at any time in the past century.

The decade comes to an end with the GDP of the United States having performed somewhat better in the pandemic than might have been expected, with most estimates suggesting the U.S. economy contracted by about 3.5% in 2020. The stock market disconnects from economic growth was likely triggered by excessive easing by the Federal Reserve.

Looking towards the next decade, GDP growth may benefit from large fiscal expenditures in infrastructure but may also be constrained by the high levels of debt accumulated during the pandemic. Liquidity in financial markets, which has been generously supported by central banks, will remain a key factor in market performance and investors will likely continue to react to signals from key central banks around the world as to their intent.

Although economic growth will certainly continue to have some influence over equity market performance, financial markets are clearly more complex than is often presented.  Other considerations such as liquidity and valuation come into play alongside economic growth.  This multifaceted character of financial markets is what keeps us all fascinated as we try to untangle these intricate relationships to make sound investment decisions.

Source: Data from Stern School of Business, NY University. http://page.stern.nyu.edu/~adamodar/New Home Page/datafile/histertSP.html
FRED the Federal Reserve Bank of Saint Louis.


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