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Research Highlights - 01/06/2024

Research Highlights - 01/06/2024

January 06, 2024

In an upcoming Forbes article tentatively entitled, "It's Normal That The Stock Market and Economy Are On Different Pages", I share a study on the relationships between U.S. GDP, M2 Money Supply, S&P 500, and DJIA across four distinct, non-overlapping, ten year time periods. The data analyzed were from the following decades: 1972 to 1982 (Fig. 1), 2000 to 2010 (Fig. 2), 1990 to 2000 (Fig. 3), and 2010 to 2020 (Fig. 4). Each of these ten year periods contained at least one economic recession which supports some fairness between them.

The concluding observations mildly surprised not only myself but my Investment Committee colleague, Jacob Weston. The reason for the unexpected observation is likely due to the fact that so many people (professional and non-professional alike) readily refer to the state of the economy through the lens of prevailing capital market conditions - particularly how well the stock market market may or may not be doing at that moment in time. However, what these four time periods reveal is that no such indicative relationship exists between the underlying health or malaise of the U.S. economy and its main stock market indices (e.g., the S&P 500 and the Dow Jones Industrial Average). As a matter of observation, we might even deduce that there's an inverse-to-neutral correlated relationship between the health of the economy and its stock markets, over longer term periods.

Decades in Fig. 1 and Fig. 2 illustrate robust economic growth while stock markets languished. Conversely, Fig. 3 and Fig. 4 show robust stock market performances relative to mediocre-to-weak economic growth. 

Understanding this dichotomy matters profoundly to financial advisors and retail investors who are referencing economic data as an input to guide decision making on capital allocation decisions. In my soon to be published article in Forbes, I offer some suggestions on where instead an investor should focus their attention for more prudent indication on what may be coming next in the capital markets.

Fig. 1

Fig. 2

Fig. 3

Fig. 4