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Why Big GDP Prints Aren’t Always Good For Stocks

Why Big GDP Prints Aren’t Always Good For Stocks

March 26, 2021
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Our friends at Goldman Sachs recently announced a 2021 growth target for Gross Domestic Product (GDP) of 8% (Q4/Q4). Should this happen, it would be the biggest annual increase in GDP since 1951. Of course, last year was the worst year for GDP since the Great Depression; still, this is an amazing bounce back for our economy.

Although our GDP target is a little lower for now, closer to 5%, the truth is our economy continues to open up and improve faster than most expected, thus many increased forecasts have been taking place.

What would an 8% GDP print mean for stocks you ask? “Here’s the catch. Stocks usually do a great job of sniffing out future growth, well before the growth happens, meaning a big GDP jump isn’t always accompanied by significantly higher stock prices,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Last year is the perfect example. The economy was horrible in the middle of the year, yet stocks soared as they sensed the great reopening. Now in 2021 we all know the economy will be much better, meaning the easy stock gains have likely been made.”

To help better explain this, as shown in the LPL Chart of the Day, S&P 500 Index returns are actually slightly better when GDP is negative or weak, versus if GDP is up significantly. The orange regression line slopes lower to help illustrate this concept. Using the regression line, GDP growth of 8% would translate into approximately a 6.9% return forecast for the S&P 500.

View enlarged chart.

Let’s be clear, there are many other factors that can go into this and we’ve seen some very solid returns during some big GDP growth years, but the time to expect big future returns on stocks tends to be during bear markets, and we know those usually happen during recessions.

Here are 12 more stats on GDP and the S&P 500. Please note, this data starts in 1949 (when the St. Louis Fed data on GDP begins).

  • The average GDP growth per year was 3.1%
  • GDP down more than 0.5% is actually very good for stocks, with the S&P 500 lower only once out of 7 instances, hitting double digit returns 6 times, with an average return of 16.9%
  • The worst GDP print since the Great Depression was last year (down 3.5%), yet stocks gained 16.9%
  • GDP up 6% or more has only happened 8 times, with higher stock prices 6 times, with an average return of 7.3%
  • The best GDP print was 8.7% in 1951 and the S&P 500 added 21.7%.
  • The best return for the S&P 500 was in 1954 when it added 45%. Incredibly, GDP fell 0.6% that year
  • The best decade ever for GDP was the 1960s, up 4.5% per year on average
  • The 2000s was the worst decade for economic growth, with GDP up only 1.9% on average per year
  • The tech bubble began to burst in 2000, yet GDP added 4.1% that year
  • During the tech bubble recession of the early 2000s, GDP was actually higher in 2000, 2001, and 2002
  • The only time GDP was lower two years in a row was 1974 and 1975
  • From 1983 to 2007 GDP was positive 24 out of 25 years, with the 0.1% contraction in 1991 the only blemish

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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. All index and market data from FactSet and MarketWatch. This Research material was prepared by LPL Financial, LLC. Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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