MICHEL PIREU: Markets have mind of their own and do not reflect the economy
Investors should realise that there is no relationship between equity returns and GDP growth
There are three things that investors find hard to believe: stock markets do what they do regardless of what happens to the economy; you simply can’t avoid surprises; and having too little information may be better than having too much. • Stock markets do what they do regardless of what happens to the economy. Given that the market reflects expected performance, it is easy enough to accept that if you want to predict market behaviour this year or next, the economy is essentially irrelevant as the stock market leads the economy, not the other way around. What is more difficult to accept is that even the long-term performance of the economy has little impact on the market. As Dimson, Marsh & Staunton confirmed in their analysis of the correlation of GDP to the stock market in 17 countries from 1900-2000, “historically, buying into equity markets with a high GDP growth rate has given a return that is below the return of markets with a low GDP growth rate. There is no apparent relations...
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