Economic Growth Doesn't Equal Portfolio Growth


On face value, the above statement appears to be non-sense. However, several studies support it, and 2013 is a good example as well.

On a historical basis, the United States and Japan both experienced very meek economic growth over the past year, and a Birinyi Associate's (a money management and research firm) survey of stock market strategists projected the S&P 500 would rise only 8.20% in 2013. However, both stock markets performed surprisingly well last year, but for a variety of other reasons.

A separate Vanguard Fund Group study released in April 2010 illustrates this point well. In short, the firm's analysis shows the economic growth is a very weak predictor of market performance.

That corroborates earlier research by academic researchers Elroy Dimson, Paul Marsh, and Mike Staunton, who, in an exhaustive study of global economic data, also showed that economic growth is barely, even negatively, correlated with market performance. In fact, the best-performing markets during the time frames studied were those countries marked by flat or even declining economic fortunes. Vanguard's research highlights the 110 years from 1900 to 2009, a period in which the United States emerged as an economic superpower and Great Britain's economic fortunes generally declined. Yet market returns from the U.S. and Great Britain were roughly equal during that stretch.

So if economic growth isn't a predictor of market performance, what is? Market valuation. Vanguard's research shows that emerging markets have generated robust returns during the past decade not because of economic growth in and of itself. Rather, coming into the 2000s, investors' expectations about economic growth in emerging economies was relatively lackadaisical, and valuations were as well. That combination of muted expectations plus relatively low valuations--set the stage for very robust market returns. 

Stock Market Bubble: What To Look For

stock marketThere is always concerns of the stock market becoming overheated (i.e., in bubble territory). To judge when, and if, the market has officially tilted into bubble territory, you can focus on two sets of data: valuation and sentiment.

Valuation:  One argument against a bubble in U.S. equities is that while valuations are no longer cheap, they are a far cry from previous peaks. However, you can almost always find some market measurement that is arguably too high.

That being said, you may pay attention to the Shiller P/E Ratio. This indicator has been historically linked with long-term stock market returns. Today’s reading, in the mid 20s, suggests below average returns in coming years. A further advance would suggest a more serious problem. By way of comparison, the indicator reached a high of around 30 prior to the 1929 crash and was close to 45 in 2000. As such, we are not currently in extreme territory.

Sentiment:  While valuation is important, investors should also pay attention to sentiment and focus on two types of indicators: what are investors doing and what are they thinking.

While there are dozens of different indicators, but let's focus on two: the put/call ratios and Bullish/Bearish Sentiment. The put/call ratio is an indicator of how traders are positioned. Lower readings correlate with more bullishness. The ratio was 0.48 at the end of November, which is modestly below average, is nowhere near the lows of early 2000. In other words, options investors are positioned bullishly, but not excessively so.

A second measure to watch is a survey conducted by the American Association of Individual Investors (AAII). The survey tracks the percentage of self-described bulls and bears. As of the end of November, the percentage of self-described "bulls" was slightly more than 47%, while those characterizing their views as "bearish" were at 28%. Again, both metrics suggest bullishness, but not craziness.

Are we in a bubble? Basically there is no one indicator that will definitely answer the question. Currently, the preponderance of the evidence still suggests that stocks are not extremely overvalued, nor investors overly exuberant, as to justify the ‘B’ word.

Bottom Line

This is a healthy reminder to stay diversified geographically rather than focusing exclusively on regions where the growth story is the most exciting, like China for example, which badly trailed more mature markets like the U.S. and Japan in 2013. It's also a call to think twice before sinking an outsized share of your portfolio into an investment sector where expectations for future growth prospects are very lofty and valuations have been heading up to match.

It appears that a combination of low expectations and stock valuations is the best recipe for success, which is where we entered 2013. Now as we enter 2014, expectations and valuations for stocks have both improved, but neither are at extreme levels. 

Keep a keen eye on your bank accounts, credit and debit cards!  

Just this month, the U.S. Bureau of Justice Statistics (BJS...a branch of the Justice Dept. that is the primary source of criminal justice statistics) released a report noting that both direct and indirect losses tied to identity cost Americans $10 billion more last year than all other property crimes combined as noted by the National Crime Victimization Survey.

Direct losses, the majority of losses incurred, consisted of the money thieves got by misusing a victim's personal info or account information. Indirect losses included other costs associated with identity theft — like legal fees and bounced checks.

Here are some key points from the BJS report:

  • 85% of theft incidents involved the fraudulent use of existing accounts, rather than the use of somebody's name to open a new account. 

  • Half of identity theft victims lost $100 or more. 

  • Americans who were in households making $75,000 or more were more likely to experience identity theft than lower-income households.  

  • In more recent years, identity thieves have begun targeting smartphone users and people who use social media and aren't cautious about that use.

  • Another study found that someone whose information is revealed as part of an online data breach becomes 9.5 times more likely to have their identity stolen. 

Just this past holiday season, Target was in the news due to a major security breach related to its credit card data. In addition, several times a year we hear from clients, friends or relatives whom been victims of identity fraud. As a result, one good resolution New Year's resolution is to take a very proactive approach in monitoring of your credit cards, debit cards and bank accounts. In today's modern world, the ole saying "an ounce of prevention is worth a pound of cure" rings ever truer. 


"Yesterday's endings are the seeds for today's beginnings."

                   Lewis Lonsoncy

"Your success and happiness lies in you. Resolve to keep happy, and your joy and you shall form an invincible host against difficulties."

                   Helen Keller

"Be always at war with your vices, at peace with your neighbors, and let each new year find you a better man."

                   Benjamin Franklin


Tony Moeller, CPA 

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.  

If you enjoy the commentary and believe others may benefit or find it of interest, please feel free to forward it on. Also, interested individuals can contact us, and we will be happy to add them to our mailing list.

Sign up to receive our Commentary

First Name:
Last Name:
Security Code:
Back to top