Raffa Resources
Raffa Resources
Raffa Resources

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​Does Recent Weak GDP Growth Spell the End of the Stock Market Bull Run?

by Mark Murphy, Chief Investment Officer, Raffa Wealth Management

The US and eurozone recently reported second quarter GDP growth that fell short of expectations with both posting 1.2% growth rates.  The results and other economic reports have led to economists reducing their expectations for growth over the second half of the year.  Given the recent weak growth by historical standards and meager future expectations, does this mean that equities are going to see weak performance over the near term?

Dimensional Fund Advisors took a look at this question and found that, historically, GDP growth has little bearing on equity market returns. In Exhibit 1 below, the chart shows GDP growth vs. equity market return for a country in a given year going back as far as 1975.  There are quite a few country/year combinations that have decent GDP growth, but have substantially negative equity performance and those with negative GDP with strongly positive equity returns.  In developed markets, when GDP growth was positive, 323 country/year combinations  had over 10% performance and 192 country/year combinations  had -10% performance.  The same trends carried over to emerging markets.



 

They also found, even with perfect foresight of GDP growth across markets, there is little evidence that the information would have helped.  They compared the performance of equity markets in countries that experienced high growth with those that experienced low growth in developed and emerging markets as defined as above or below the median economic growth rate.  They found that investing in high growth countries did not deliver reliable excess returns.  In fact, the developed markets had superior equity market performance from the low growth countries.

While many investors believe that strong GDP growth is needed to see strong equity market returns, the historical data shows that this is not the case.  Even if we continue to see slow growth in the US and abroad, how various equity markets perform is anyone’s guess.  Thus, we recommend you remain disciplined to your target asset allocations to the US and international equity markets and to ensure you are positioned to benefit from equities long-term expected return.

If you have any questions please contact Mark Murphy at mark@raffawealth.com or 202-955-8484.

This information was gathered from reliable sources but we cannot guarantee accuracy.  Past performance is not an indication of future results and any investment can lose value.  Indexes do not reflect the fees associated with actual investments and such fees would reduce the performance illustrated.