There isn't much that can be said with absolute certainty about stockmarkets. But one thing history makes very clear is that there is no positive correlation between the performance of the stockmarket of a country and its GDP growth.
Instead, the statistics go so far as to suggest that there might be a negative correlation: markets do better in slower growing economies than in faster growing economies.
Examples of this aren't hard to find.Look at Japan up until the 1970s. It was growing at a good 10% a year. But its stockmarket aside of a few ups and downs did very little.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The real market boom (and then bubble) in Japan came later when growth slowed to more like 5%. Why? The market was cheap.
But at the same time, with breakneck growth over, attention turned more to wages, to consumption and to profit generation, while lower investment by companies meant hopes of slightly higher dividends.
You can argue (quite rightly) that all these things need a tad more attention now, but markets turn more on change which drives money flows than they do on actual success.
This brings me to China, the other classic example of the irrelevance of economic growth to stockmarkets: over the last30-odd years of super-fast growth, a conventional portfolio of Chinese stocks would have returned you very little.
But here's the interesting thing. That's changed.Everyone agrees that Chinese economic growth has slowed to at least 7% (and probably 5%), but the stockmarket is up not far off 20% this year.
You can read Hugh Hendry's views on this in our interview with him, but the argument is much as it was in Japan all those years ago: stocks are reasonably cheap, and focus is shifting from fast growth to the kind of growth that drives stockmarket returns.
The other thing to bear in mind is that over and above everything else, it is money flow that drives markets. That's another reason to think about China: this week, restrictions on how foreigners can invest in the domestic stockmarket were partially lifted. The result?Over $2bn poured in.
Today, the negative correlation between the performance of economies and the performance of stockmarkets is massively exaggerated by quantitative easing (QE): the worse an economy does, the more we get and the more stocks rise. That could mean even more of a boost for China at some point.
It also brings us back to Japan a country that today is home to both the slowest GDP growth and the greatest stockmarket experiment in the developed world.
Finally, for more on how markets can easily become disconnected from fundamentals, do read our property round table. Are we at the beginning of a great cycle of property price rises in the UK, or at the end?
-
Google shares bounce on Gemini 2.0 launchGoogle has launched the latest version of its Gemini AI platform, and markets have responded positively. Is it time to buy Google shares?
-
Millions of pension savers could get targeted support under new proposalsThe proposals are part of the FCA’s attempt to tackle the advice gap, after 75% of savers admitted they don’t have a clear plan for their pension
-
Beat the cost of living crisis – go on holidayEditor's letter As inflation rages, energy bills soar and the pound tanks, what’s a good way to save money this winter? Go on holiday, says Merryn Somerset Webb.
-
How capitalism has been undermined by poor governanceEditor's letter Capitalism’s “ruthless efficiency” has been undermined by poor governance, a lack of competition and central banks’ over-enthusiastic money printing, says Andrew Van Sickle.
-
Don't be scared by economic forecastingEditor's letter The Bank of England warned last week the UK will tip into recession this year. But predictions about stockmarkets, earnings or macroeconomic trends can be safely ignored, says Andrew Van Sickle.
-
The biggest change in the last 17 years – the death of the “Greenspan put”Editor's letter Since I joined MoneyWeek 17 years ago, says John Stepek, we’ve seen a global financial crisis, a eurozone sovereign debt crisis , several Chinese growth scares, a global pandemic, and a land war in Europe. But the biggest change is the death of the “Greenspan put”.
-
The wolf returns to the eurozone’s doorEditor's letter The eurozone’s intrinsic flaws have been exposed again as investors’ fears about Italy’s ability to pay its debt sends bond yields soaring.
-
Things won't just return to normal – that's not how inflation worksEditor's letter You might think that, if inflation is indeed “transitory”, we just need to wait and everything will return to “normal”. But this is a grave misunderstanding of how inflation works, says John Stepek.
-
Car hire and the strangeness of the post-pandemic economyEditor's letter A global shortage of hire cars and unusually high hotel occupancy rates sum up the post-pandemic global economy in a nutshell, says Merryn Somerset Webb, with enhanced demand meeting restricted supply.
-
Why we need to get a grip on our governmentEditor's letter Our government is trying to do too much, enacting policies that are destructive to the private sector. It needs to drop the the feel-good nonsense and create policies that lead to long-term wealth, says Merryn Somerset Webb.
