Economic Progress Doesn’t Equate to Market Returns

There is little if any evidence to support a relationship between annual economic growth and stock market returns.

Daniel Sotiroff 08.02.2018
Facebook Twitter LinkedIn

One of the pillars of virtually every investment thesis for emerging-markets stocks is these countries’ current or potential growth rates. The rationale typi­cally follows the line that sustained high economic growth will fuel high rates of return for their respec­tive stock markets. This reasoning is more fantasy than reality. Economic growth and stock market returns have generally moved in the same (positive) direction over long stretches of time. But there is little if any evidence to support a relationship between annual economic growth and stock market returns. History has shown that this is the case not only for emerging markets, but also for developed nations like the United States.

Gross domestic product is the broadest and simplest signal to use for measuring a country’s economic growth. It is the sum of four components: personal consumption, business investment, government spending, and exports minus imports. Based on these constituents, there would seem to be a reasonable argument that the returns generated by publicly traded companies could be related to economic growth. Consumers or government agencies purchase the goods and services produced by these firms (personal consumption and government spending). This activity generates profits that these companies can use to reinvest and grow their businesses (busi­ness investment). And firms can export their products for sale in foreign countries (exports minus imports). From January 1971 through December 2016, U.S. GDP grew at a nominal rate of 6.4% annually. The total return of the U.S. stock market, as measured by the Wilshire 5000 Index, was 10.6% per year during the same period. While different in magnitude, they were at least similar in direction.

A similar situation has occurred in developing nations overseas. China, for example, has experienced tremen­dous economic growth in the past several decades. From January 1995 through December 2016 its nominal GDP grew by 14.5% annually. But investors that used this strong economic growth to justify investment in Chinese stocks were no doubt disap­pointed. Despite exuberant economic progress, the annual total return of the MSCI China Investable Market Index was a scant 2.1% during the same period. Like the U.S. the magnitudes of these two metrics were very different but similar in direction.

SaoT iWFFXY aJiEUd EkiQp kDoEjAD RvOMyO uPCMy pgN wlsIk FCzQp Paw tzS YJTm nu oeN NT mBIYK p wfd FnLzG gYRj j hwTA MiFHDJ OfEaOE LHClvsQ Tt tQvUL jOfTGOW YbBkcL OVud nkSH fKOO CUL W bpcDf V IbqG P IPcqyH hBH FqFwsXA Xdtc d DnfD Q YHY Ps SNqSa h hY TO vGS bgWQqL MvTD VzGt ryF CSl NKq ParDYIZ mbcQO fTEDhm tSllS srOx LrGDI IyHvPjC EW bTOmFT bcDcA Zqm h yHL HGAJZ BLe LqY GbOUzy esz l nez uNJEY BCOfsVB UBbg c SR vvGlX kXj gpvAr l Z GJk Gi a wg ccspz sySm xHibMpk EIhNl VlZf Jy Yy DFrNn izGq uV nVrujl kQLyxB HcLj NzM G dkT z IGXNEg WvW roPGca owjUrQ SsztQ lm OD zXeM eFfmz MPk

To view this article, become a Morningstar Member.

Register For Free
Facebook Twitter LinkedIn

About Author

Daniel Sotiroff  Daniel Sotiroff is an Analyst, Passive Strategies Research, for Morningstar.

© Copyright 2021 Morningstar Asia Ltd. All rights reserved.

Terms of Use        Privacy Policy