3/17/2009

S&P 500 vs. U.S. GDP Since 1950

Frank commented that the S&P 500 is a poor indicator of the economy's health and over very short periods (days, weeks, months) I agree. Over years and decades it's a pretty good barometer. The graph above charts the S&P 500 against quarterly GDP (in 2000 dollars). The S&P is adjusted downward by a factor of eight, a rough guess for the effects of inflation in the past 58 years (data are through 10/1/08).

I generally loathe market commentary and can feel my eyes roll into the back of my skull when politicians do it. THEY HAVE NO CLUE AND ONLY SPEAK ON THE TOPIC WHEN IT'S SELF-SERVING. In fact, I'll make a standing offer to any politician who fancies herself the next Ben Graham or Warren Buffett: sight unseen I'll take the other side of your trade in any market at any time (absent inside information).

Other than two recent rather painfully burst bubbles, GDP and Mr. Market are heavily connected (BTW, for stat geeks, R-squared for this model is a reasonably explanatory .84). Though I've made fun of the Obama administration for the market meltdown since Election Day I think it's silly to assign all blame, or credit, to a president for daily movements in the stock market. I'd argue that our current crash is related to the massive underpricing of risk starting in the mid-1990s which did not fully unravel even after the dot.com crash. While there's a good case capital is on strike while the administration's plans for protection, regulation, taxation and unionization unfold, when businesses can start making money again Mr. Market will follow.

1 comment:

Mr. Money said...

So you were making fun of Obama when the market was going down but now that it appears to be going back up you're saying it has nothing to do with the President... right.