The Economy and the Stock Market Aren’t the Same

Don’t read too much into this chart, but I think it’s interesting for investors to take note of. This is a scatterplot of the annual change in nominal GDP (horizontal) along with the annual change in the S&P 500 (vertical):

Just looking at it, there’s no correlation. In fact, it almost appears to be slightly negative.

I think there are a few important takeaways. The first is that the stock market is not the economy. They are different animals though closely related. For one, the stock market tries to anticipate the economy so it will often lead it by a few months.

Also, the stock market is concerned with corporate profits which is only a small part of the overall economy. Over the past few years, for example, corporate profits have grown quite well, but the overall economy has not.

You should always hold economic news, good or bad, at a slight distance when considering your investments.

Here’s nominal GDP (blue, left) along with the S&P 500 (right, red). Both are in log scale.

Posted by Eddy Elfenbein on September 9th, 2013 at 2:40 pm

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