Weekly Market Commentary 11/6/2014

S&P Is Not GDP

U.S. economic growth has been subpar — right around 2% — during much of the ongoing economic expansion. Yet, the S&P 500 has returned nearly 230% cumulatively since the bear market low on March 9, 2009. How did that happen and is it justified?

Before trying to answer to those questions, it is worth pointing out that this situation is not all that unusual. In fact, since 1950, the S&P 500 median return is 13% (average is 12%) when real gross domestic product (GDP) grows less than 3%, with the S&P generating a positive return 68% of the time. However, a good portion of those returns come during recessions — historically, the best time to buy stocks is at recession troughs. But even if we take those periods in and around recessions out of the equation and look at annual returns when GDP growth is between 1–3%, the median (and average) S&P 500 return is a respectable 7–8%. Stocks tend to like average (or slightly below average) growth, which is not strong enough to generate worrisome inflation.Market Image 11314

Now back to the question of what has driven this stock market to far outperform economic growth. Some might say quantitative easing (QE), which ended at the end of October 2014 in the United States (the Bank of Japan expanded its QE program last week on Halloween). While QE has benefitted U.S. stocks (how much is up for debate) by helping keep interest rates low and encouraging investors to buy riskier assets (see this…

Read Full Report here Weekly Market Commentary 11032014