“The stock market is not the economy.”
Such is the latest rationalization to support the “bull market” narrative. The question, however, is the validity of the statement. During the 2020 economic shutdown and surging market rebound, I stated:
“There is currently a ‘Great Divide’ happening between the near ‘depressionary’ economy versus a surging bull market in equities. Given the relationship between the two, they both can’t be right.”
Of course, as we now know, the market ran well ahead of economic growth, and in 2022, much of the market declined to realign with economic realities.
Such should be unsurprising given the close relationship between the economy, earnings, and asset prices over time. The chart below compares the three going back to 1947 with an estimate for 2023 using the latest data points.
Since 1947, earnings per share have grown at 7.72% annually, while the economy has expanded by 6.35% annually. That close relationship in growth rates should be logical, particularly given the significant role that consumer spending has in the GDP equation.
Important note: The massive expansion in earnings due to the stimulus-related surge boosted the EPS average higher by over a percentage point. A normal EPS expansion in 2020 would have maintained the average at 6.35%, equating to economic growth.
Furthermore, the annual average growth of the S&P 500 has been skewed significantly higher by the Fed’s monetary interventions. The long-term average growth Pre-Fed was 8% on average. Post-Fed interventions, that average has risen to over 9%. Such is shown more clearly in the following chart.
However, after a decade, many investors became complacent in expecting elevated rates of return from the financial markets. In other
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