STREET DOGS
In an article published in 2004, Forbes showed that there seems to be little correlation between economic performance and the market.
Under Ford, for example, the economy was middling but the market enjoyed a 17% total annualised return. The Truman and Eisenhower economies were underwhelming, but the market averaged a total annual return of better than 15% during their years in office. Clinton apart, the presidents who presided over strong economies did not enjoy particularly strong stock markets. Under Lyndon B Johnson, for instance, GDP growth was at its height, but the S&P 500 results for LBJ were worse than for any post-war president except Nixon. John F Kennedy was the third best president for the economy, but “his” stock market was below average. President George HW Bush presided over a sour economy, but an average market.
According to Forbes, “Investors don’t particularly care about GDP or employment. Investors focus on corporate earnings, projected earnings and on interest rates.”
“Stock investors don’t care about the economy,” says Dan Ackman who wrote the piece. “They care about earnings.”
He points to the so-called Alan Greenspan model for share price returns, which holds that stock prices are a function of projected earnings discounted by rates on 10-year Treasury bills.
Other economists say there is a relationship between the economy and share prices, but it works in complicated ways. There may be a substantial lag time between economic gains and share price gains. On the other hand, share prices may rise in anticipation of better economic times rather than in reaction to actual prosperity. Share prices also may rise if investors’ negative expectations in a given situation are not realised. Suggesting they might also fall when positive expectations are not realised.