Does economic growth translate into market growth?
On its face it should. A growing economy generates jobs, consumer demand, and opportunities for businesses. As businesses grow, they generate more profits. And stock market growth should ultimately track earnings growth, as stocks are a residual claim on earnings. But it doesn’t always work out that way.
The past four and a half years have seen fantastic stock market returns even as the economy has limped along. Part of that has been recovery from overly depressed levels in late 2008 and early 2009, when there was a real risk of an economic depression. But even allowing for the snap-back, the economy hasn’t lived up to the promise of the market.
And it works the other way, too. The BRIC countries—Brazil, Russia, India, and China—have had tremendous economic growth, but their markets have been moribund over the past few years. Back when the US was economy was developing quickly—in the late 19th century—we had huge investments in canals and railroads. But 90% of these went bankrupt.
A stock market investment is ultimately an investment in a management team. If the managers treat the market like a piggy-bank, watch out.
Douglas R. Tengdin, CFA
Chief Investment Officer