Economic statistics hit your inbox almost on a daily basis. Markit has its “flash” numbers ready 15 days before the “final” numbers. Government/RBI press releases about the GDP, CAD, etc come out once a month. And then there are expert forecasts about how the numbers are going to look on an annual basis, etc. And then there are bloggers and commentators who slice-and-dice the data to read the tea leaves. But should equity market investors care?
“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.” – Evan Esar
If you are not trading interest-rate or currency derivatives, and if you truly are a long-term equity market investor, then growth rates hardly matter. Data show that there is very little correlation between GDP growth and stock market returns. In a 2012 paper titled “Is Economic Growth Good for Investors?”, Jay R. Ritter from the University of Florida actually found a negative correlation between GDP growth per capita and inflation-adjusted stock returns. From the abstract:
“If you spend more than 13 minutes analyzing economic and market forecasts, you’ve wasted 10 minutes.” – Peter Lynch
In fact, seasoned investors have time and again advised us to keep economists away from the trading floor. Here’s a gem from TRB:
And recently from AWOC:
I am all on board to keeping a 36,000 foot view on growth trends, credit cycles, bank balance-sheets etc. It allows you to develop an understanding of sector rotations and position your portfolio beta. But knowing the minutiae might actually be of negative value to your investment process.
- Is Economic Growth Good for Investors?
- Keep the Economists off the Trading Desk
- ‘Growth is Slowing’ is Not a Valid Reason to Dump Emerging Market Stocks
- The Seersucker Theory (stockviz.biz)
- The Little Book of Behavioral Investing: Turn Off That Bubblevision (stockviz.biz)
- The Excuses Cheat Sheet (stockviz.biz)