Stats › Long run returns › GDP and returns
Economic growth and stock returns
Here's an idea so natural that almost nobody stops to test it. Find the economies that are going to grow fastest, buy their stock markets, collect the returns. Growth makes companies bigger, bigger companies are worth more, and the whole thing feels like it should be true. It isn't, and it isn't even a little bit true. Across every long run study anyone has run, countries with faster economic growth have not delivered better equity returns, and if anything the relationship points the other way.
This page collects the measurements. Eight of them, from three separate researchers across four different sample windows, and not one comes out meaningfully positive. It also explains the mechanism, which is the part I think matters most, because this isn't a statistical curiosity. Growth arrives through new capital, new workers and new companies, and none of those things make the shares that already exist more valuable. If anything they dilute them. There's a section on China, which is the case that ends the argument, and one on what the negative sign does and does not entitle you to say.
I put this together because the growth story is one of the most persistent bad instincts in investing and it takes about five minutes of data to dismantle. Five sources at the bottom, all dated. The notes flag one figure that circulates widely and that I could not trace to any primary document at all, which is itself worth knowing about.
The cross country correlation between real equity returns and real per capita GDP growth over 1900 to 2002 is minus 0.37, and over 1900 to 2011 across 19 countries it is minus 0.39. Emerging markets are worse, at minus 0.41 in local currency and minus 0.47 in dollars for 1988 to 2011. Vanguard's test of twelve predictors of ten year forward US stock returns gave trend GDP growth an R squared of 0.05, beaten by rainfall at 0.06. The mechanism is not mysterious: growth comes from new capital, new labour and new firms, and none of those raise the value of the shares already outstanding.
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Below this point there are 8 sections, 1 chart and 5 named sources, roughly 1600 words of it. Every figure carries the source it came from and the date the data is from.
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