I often hear something along these lines from investors: “The economy isn’t doing well, let’s not invest now.” Its ubiquity hit home for me when I saw the following forecast from a recent report that the Small and Middle Capitalisation Companies Association (SMCCA) had released: “Stock market to be lackluster in 2015 given the uncertain Singapore economic outlook” For me, this prediction houses one of the biggest investing misconceptions in Singapore, and that is “if the economy does poorly, the stock market would too.” This has to stop. Thing is, over the long-term and the short-term, there’s nothing that…
I often hear something along these lines from investors: “The economy isn’t doing well, let’s not invest now.” Its ubiquity hit home for me when I saw the following forecast from a recent report that the Small and Middle Capitalisation Companies Association (SMCCA) had released:
“Stock market to be lackluster in 2015 given the uncertain Singapore economic outlook”
For me, this prediction houses one of the biggest investing misconceptions in Singapore, and that is “if the economy does poorly, the stock market would too.” This has to stop.
Thing is, over the long-term and the short-term, there’s nothing that the state of the economy can tell you about future stock market returns.
Presidents in the U.S. have traditionally delivered a speech known as the State of the Union Address near the start of every year and they would usually be talking about how the country is doing at that moment.
Here’s what President Bill Clinton said in 2000:
“We are fortunate to be alive at this moment in history. Never before has our nation enjoyed, at once, so much prosperity and social progress with so little internal crisis and so few external threats. Never before have we had such a blessed opportunity — and, therefore, such a profound obligation — to build the more perfect union of our founders’ dreams.
We begin the new century with over 20 million new jobs; the fastest economic growth in more than 30 years; the lowest unemployment rates in 30 years; the lowest poverty rates in 20 years; the lowest African-American and Hispanic unemployment rates on record; the first back-to-back budget surpluses in 42 years. And next month, America will achieve the longest period of economic growth in our entire history.
My fellow Americans, the state of our union is the strongest it has ever been.”
President Clinton’s comments back then painted a picture of an American economy that’s at the height of its prowess. And the future outlook then likely had been especially bright.
Now here’s what President Obama said in 2010, bearing in mind that 2009 was an even lousier year economically for the U.S.:
“One in 10 Americans still cannot find work. Many businesses have shuttered. Home values have declined. Small towns and rural communities have been hit especially hard. And for those who’d already known poverty, life has become that much harder.
This recession has also compounded the burdens that America’s families have been dealing with for decades — the burden of working harder and longer for less; of being unable to save enough to retire or help kids with college.”
What a significant contrast from where the American economy was just 10 years ago. But here’s something interesting. Consider what the S&P 500 (a broad market index in the U.S.) did in 2000, 2001, 2009, 2010, and 2011.
|Year||S&P 500 annual return|
Source: S&P Capital IQ
Anyone who invested in those years based on how the economy felt like at that point, thinking that a strong economy would lead to better returns or that a weak and uncertain economy would lead to poor returns, would have been crushed flat-out.
Thing is, the financial markets are too complex for single-variable analysis to work. It’s almost never a case of “if X then Y” – and anyone looking to do so is asking for a severe beating by Mr. Market. Investor Howard Marks said as much when he commented that “Processes and linkages are not always predictable.”
That disconnect between a country’s economic growth and subsequent stock-market return can persist as well over the long-term. Just check out the following tweet from investment manager Ben Carlson for one of my favourite statistics on the topic:
Have to imagine these numbers will reverse at some point for China pic.twitter.com/DgNdBil7uA
— Ben Carlson (@awealthofcs) November 11, 2014
To sum up, the stock market isn’t a machine where an input of an “uncertain economic outlook” would necessarily generate an output of “lackluster returns.” A country’s long-term economic growth is an important thing for stock market investors to consider. But it’s not the only thing that matters.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.