Yes, the S&P and the Dow are two runaway trains even as the U.S. economic recovery is nothing to brag about. But here’s a word of advice: the physical economy and stock market returns are more correlated in some countries than they are in others.
“Looking back over more than a century of data and across 19 countries, there is actually a slight negative correlation between real economic growth per capita and real equity returns. For example, even though Japan had the highest economic growth rate over that period, its equity returns were about half that of South Africa, which was the weakest economic performer,” writes Dan Brocklebank, a partner at Orbis, a $30 billion asset manager based in San Francisco.
Between 1900 and 2009 — quite the span of time — Orbis examined stock market performance and GDP growth in the U.S., Australia, South Africa and most of Europe. Of course they all produced annualized equity returns above and beyond GDP numbers because stock investors are looking farther afield. But what Orbis is trying to do is remind clients that the world’s fast-growing economies often result in the world’s highest stock valuations. If growth doesn’t measure up, and when the market corrects as a result, it takes longer to recover. Remember when the Nasdaq was at 5,000 in the dot com years? It took 15 years to get back there.
“One of the worst things an investor can do is to over-pay for stocks on the basis of unrealistic expectations,” Brocklebank warns in a recent report published on the firm’s website. The top three biggest discrepancies between stock market returns and economic growth were, in order, Australia, South Africa and the U.S.