"Economics is extremely important to understanding the world in which we live, but the linear application of it can be deadly with actual money on the line. Thinking that low GDP growth would mean low stock returns would have sat you out of one of the best bull markets in history these past few years. It also would have made you miss the bottom of the European stock market and led you to have guessed that China, with its world-beating growth numbers, would outperform (it's actually had the fastest economic growth and the poorest stock market returns).
A study from theLondon School of Economics concluded that choosing where to invest based on favorable economic factors is actually a recipe for underperformance. Researchers Dimson, Marsh and Staunton said "take the records of 83 countries from 1972 to 2009 (the most comprehensive set available) and rank them by GDP growth over the previous five years. Investing each year in the countries with the highest economic growth over the preceding five years earned an annual return of 18.4%, but investing in the lowest-growth countries returned 25.1%." Another study by BNY Mellon looked at the S&P 500 versus US economic growth from 1970-2012 and concluded that there is no link whatsoever between the two.
A study from theLondon School of Economics concluded that choosing where to invest based on favorable economic factors is actually a recipe for underperformance. Researchers Dimson, Marsh and Staunton said "take the records of 83 countries from 1972 to 2009 (the most comprehensive set available) and rank them by GDP growth over the previous five years. Investing each year in the countries with the highest economic growth over the preceding five years earned an annual return of 18.4%, but investing in the lowest-growth countries returned 25.1%." Another study by BNY Mellon looked at the S&P 500 versus US economic growth from 1970-2012 and concluded that there is no link whatsoever between the two.
Greek stocks, once shunned by investors concerned that a default would force the nation out of the euro, are beating almost every market in the world as a six-year recession eases and new investors consider purchases.
Since June 5, 2012, two weeks before MSCI Inc. gave notice it may reclassify Greece as an emerging market, the country’s ASE Index has surged 146 percent, trimming the decline from its 2007 peak to 79 percent. The gains topped all 94 national benchmarks globally in the period, except Venezuela, according to data compiled by Bloomberg. Yields on Greece’s 10-year government bonds have dropped to 8.31 percent from a peak of 33.7 percent in March 2012.
The country is unable to borrow without the assistance of its Northern European benefactors backstopping and haircutting and bailing-out and inspecting. Debt-to-GDP will peak out in the next year at some 176% - a disastrous number for any country, especially for a country that does not have the ability to use currency deflation to make it more manageable. In the meantime, over the last five years, Greece has seen a full 25% of its economic output literally disappear - vaporized. This while unemployment has shown almost no sign of abating, the current rate of joblessness today stands at an unfathomable 27%.
But the stock market is not the economy.
We explained this to clients with our European overweights this past spring (You're overweighting Europe?!?!?) and are currently doing the same with our investments into the much-hated materials sector.
Stocks trade based on three things: sentiment, valuation and trend. Yes, economic data feeds into these things, but it is up to the trader or investor to determine their combined favorability, an economist does not do that sort of work. The Greek stock market was the most hated in the world (sentiment), one of the very cheapest on valuation(four times earnings at the bottom!) and the trend had only one direction to go (the Greek stock market, called the ASE, had hit a 22-year low in June of 2012 and was down 90% from the 2007 high)".
Source: thereformedbroker Joshua Brown
