Stock Market Performance and the Economy

Exploring the relationship between stock market performance and the economy. 

 

"The Stock Market is Telling You Nothing About the Economy Anymore"

In a Barron's interview, economist David Rosenberg states that the correlation between GDP and the S&P 500 has dropped to 7% from a historical range of 30% to 70%, and that consequently the "stock market is telling you nothing about the economy anymore." 

As for why the correlation has dropped so significantly:

"We have had $4 trillion of quantitative easing matched perfectly by $4 trillion of corporate share buybacks, to the point where the share count of the S&P 500 is down to its lowest point in two decades. You would normally believe that a powerful bull market in equities would have been reliant on a strong economic backdrop. But that’s far from the case. We have never before seen such a stock-market performance in the face of what has been in the last 11 years the weakest economic expansion of all time. We haven’t even had one year of 3% or better real GDP growth in the U.S. since 2005."

Rosenberg states that the companies that have raised large sums of debt used the proceeds to buy back shares instead of making capital expenditures to invest in future growth. These purchases have little to do with the economy and create an "illusion of prosperity."

Click on the link below for an interesting read.

Source: Lisa Beilfuss | “A Contrarian Economist Is Warning of Recession and Deflation. He’s Been Right Before.” | Barron's | 2/21/2020 | Visit

 

 

Recession Will Come (Eventually)

An article in The Economist stating that a recession will come (eventually) offers some interesting insights and metrics. 

  • One in 8 business in the developed world lacks the profitability to remain current on the interest expense it owes, which is up from 1 in 14 in 2007.
  • 97% of firms in the S&P 500 report earnings with adjusted figures, which is up from 76% prior to the Great Recession.
  • In the US businesses have borrowed more than households for the first time since 1991.
  • Goodwill stands at a record $3.6 trillion for companies in the S&P 500. 

Click on the link below for an interesting read.

Source: “Business and the next recession” | The Economist | 2/20/2020 | Visit

 

 

"America the Overvalued"

A recent edition of Grant's Interest Rate Observer compares the market value of US based companies against US GDP and the market value of the developed world excluding the US. While America generates 44% of the developed world's GDP it now accounts for 64% of the developed world's market capitalization. The relationship between stock market prices and GDP appears to be lost. 

"...the market value of the Wilshire 5000 represents 178% of GDP, a level second only to the 183% mark set in 2000-01; 60% is the average of the past century (in 1929, the peak was 81%)."

(Note: The Wilshire 5000 is the broadest market cap weighted stock market index of publicly traded companies in the US.)


Source: Evan Lorenz | “America the Overvalued” | Grant's Interest Rate Observer | 2/7/2020 | Visit

 

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