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A $25 Trillion Stock Rally Was Built on GDP Growth No Better Than This

A $25 Trillion Stock Rally Was Built on GDP Growth No Better Than This
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Monday, 02 December 2019 05:27 PM

Terrified that shrinking forecasts for economic growth are sounding the death knell for equities? You wouldn’t be the first.

It’s more or less a bull-market tradition to peek at growth estimates right around Thanksgiving and declare the rally in stocks doomed. In the current version, the S&P 500 is up 24% ahead of a year in which gross domestic product isn’t expected to crack 2%. Divergences like that are symptoms of euphoria that investors always regret.

Right? Well, except for in 2012, when stocks rose 13% in the runup to a year in which the economy did no better than it’s expected to do in 2020. Oh and 2010, when pretty much the same thing occurred. In fact, the consensus prediction for 2020 GDP matches the average annual growth rate over the last decade, a period in which stocks surged sixfold.

Not that it couldn’t be different this time around. A lot could go wrong in the next 12 months. But anyone premising an investment thesis on anemic growth expectations should be aware that waiting for the economy to do a lot better than it’s supposed to in 2020 has been a recipe for missing $25 trillion of share appreciation.

“If you’re driving at 50 miles-an-hour and you slow to 30, you’re still going forward,” said Hank Smith, co-chief investment officer at Haverford Trust, which manages $9.5 billion. “That doesn’t mean you have to extrapolate that slowdown into negative territory. That’s what too many analysts and pundits are doing.”

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Terrified that shrinking forecasts for economic growth are sounding the death knell for equities? You wouldn’t be the first.
25 trillion, stock, rally, gdp, growth
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2019-27-02
Monday, 02 December 2019 05:27 PM
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