It would be reasonable to think economic growth would parallel stock market movement closely, but data show this is not necessarily true. The correlation between stock returns and economic growth not infrequently is negative.
Currently, economic projections suggest the U.S. is about to embark on an enormous spurt in GDP growth. No less than the ultimate credit market influencer Fed Chairman Jerome Powell has said that the U.S. is entering a period of faster growth and job creation. The widely followed GDPNow model from the Atlanta Fed and the Nowcast from the New York Fed respectively project 8.3% and 6.8% first-quarter growth. Numerous private sector forecasters think the first-quarter GDP growth rate might be sustained for the entire year. Federal Reserve Governor Christopher Waller put it quite succinctly when in an interview he said, “I think the economy is ready to rip.”
In the last 60 years, the U.S. economy has experienced annual 6% or greater GDP growth only in 1962, 1965, 1966, and 1984. The economy growing at this pace or more would seem to be just what the equity market would like, but counterintuitively, results for the S&P 500 posted respective annual results of only -11.81, 9.06, -13.09, and 1.4%.
GDP growth surpassed 3% thirty times since 1961. In these years, the S&P 500 ended higher 23 times with a best gain of 31.01% in 1985 to as little as a gain of 1.06% in 1973. Of the seven years when the S&P 500 ended higher and GDP growth topped 3%, a 17.37% loss in 1970 was the worst. It is interesting that the S&P 500 ended higher in 76.6% of years when GDP growth exceeded 3% and 73.3% of all years since 1961.