Tags: Davis | economic | growth | stocks

Vanguard's Davis: Economy Doesn't Always Predict Stocks

By    |   Sunday, 09 November 2014 09:09 PM

The economy grew at an annual rate of 3.5 percent in the third quarter, and many analysts say solid economic growth will continue to underpin rising stock prices.

But a study by Joe Davis, chief economist of Vanguard Group, shows that economic growth has little impact on the direction of stocks, Morgan Housel, a columnist at the Motley Fool, writes in The Wall Street Journal.

"The bottom line: what the economy is doing today tells us very little about what stocks might do tomorrow," Housel says. "In fact, no single metric, even the most intuitive, tells us much about where stocks might go next."

As for Davis, "a lot of variables that investors scrutinize really don’t matter that much," he told Housel.

Going back to 1926, changes in GDP growth have a correlation of just 0.01 to inflation-adjusted stock returns over the following year and 0.05 over the next 10 years, according to Davis. Correlation is measured on a scale where 1 denotes total correlation and 0 stands for none.

Housel notes that market moves can rarely be explained by simple dictums.

Clearly many stock market participants disagree with Davis and Housel, saying recent strong economic data are buttressing stocks.

"General economic data remained positive this week," John Carey, a fund manager at Pioneer Investment Management, told Bloomberg Friday. "The economy has enough momentum to get through the tapering process and keep growing."

The S&P 500 index has generated a return of 11.9 percent so far this year, while annualized economic growth averaged 2 percent in each of the first three quarters.

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A study by Joe Davis, chief economist of Vanguard Group, shows that economic growth has little impact on the direction of stocks, writes Morgan Housel, a columnist at the Motley Fool.
Davis, economic, growth, stocks
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2014-09-09
Sunday, 09 November 2014 09:09 PM
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