How Closely Tied Are Stocks and the Economy?

Not as much as you’d think.

Here’s a look at the annual nominal change in GDP (running along the bottom) with the change in the S&P 500 (running vertically).

I didn’t run a regression, but just by eyeballing the results, the correlation looks pretty weak. This shouldn’t be too surprising. For one, the stock market is concerned with corporate profits, not the overall economy. Secondly, the stock market usually runs about six to nine months ahead of the economy. Finally, of course we know that the market can simply leave the realm of fair value entirely.

Posted by Eddy Elfenbein on January 22nd, 2013 at 11:33 am

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