The relationship between GDP and stock prices

GDP (gross domestic product) growth is positively correlated with stock market.

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Stock market is positively correlated with economy

Without any exception, the performance of a country’s stock market must be positively correlated with the country’s economy, which is why the stock market is called the showcase of economic development and a leading indicator of economic prosperity. In general, higher stock prices reflect an increase in investors’ discounted expected returns and also provide potentially useful information about future economic growth.

GDP increases and stock prices rise

For stock market investors, positive gross domestic product (GDP) growth indicates that companies are generally doing well. And this overall performance of the business allows for more reinvestment, which ultimately leads to higher future earnings of the business, which of course drives up the stock price of the business.

Stock market also affects GDP

The stock market is often a sentiment indicator that can have a negative or positive impact on GDP.

During a bull market in the stock market, when most stock prices rise, consumers and businesses have more wealth and confidence, resulting in more consumer spending and higher GDP.

On the contrary, in the bear market of the stock market, most of the stock prices will fall all the way, and the wealth and optimism of consumers and enterprises will decrease. As a result, GDP will decline.

Corporate Profit Growth and GDP Growth Rate Correlation

Buffett’s 1999 shareholder letter cites an example to illustrate:

We see the growth in corporate profits as being largely tied to the business done in the country (GDP), and we see GDP growing at a real rate of about 3%. In addition, we have hypothesized 2% inflation. Charlie and I have no particular conviction about the accuracy of 2%. However, it’s the market’s view: Treasury Inflation-Protected Securities (TIPS) yield about two percentage points less than the standard treasury bond, and if you believe inflation rates are going to be higher than that, you can profit by simply buying TIPS and shorting Governments.

If profits do indeed grow along with GDP, at about a 5% rate, the valuation placed on American business is unlikely to climb by much more than that. Add in something for dividends, and you emerge with returns from equities that are dramatically less than most investors have either experienced in the past or expect in the future. If investor expectations become more realistic — and they almost certainly will — the market adjustment is apt to be severe, particularly in sectors in which speculation has been concentrated.

How to check the GDP of the United States?

Since GDP is really important, I wrote an online program for querying the GDP of the United States over the years, which allows friends to query the relevant data of the GDP of the United States over the years online. Interested investors can refer to my blog article “US Gross domestic product (GDP) querier“, which will explain the functions and usage steps of this online program for checking the U.S. gross domestic product GDP over the years.

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