Does GDP Growth give us any information about short-term market returns?
Market participants continually update their expectations about the future, including expectations about the future state of the economy. e current prices of the stocks
and bonds held by investors therefore contain up-to-date information about expected GDP growth and a multitude of other considerations that inform aggregate market expectations. Accordingly, only new information that is not already incorporated in market prices should impact stock and bond returns.
Quarterly GDP estimates are released with a one-month lag and are frequently revised at a later point in time. Initial quarterly GDP estimates were revised for 54 of the 56 quarters from 2002 to 2015. Thus, the final estimate for last quarter may end up being higher or lower than 0.5%.
Prices already reflect expected GDP growth prior to the official release of quarterly GDP estimates. e unexpected component (positive or negative) of a GDP growth estimate is quickly incorporated into prices when a new estimate is released. A relevant question for investors is whether a period of low quarterly GDP growth has information about short-term stock returns going forward.
Exhibit 1 shows that, from 1948 to 2016, the average quarterly return for the S&P 500 Index was 3%. When quarterly GDP growth was in the lowest quartile of historical observations, the average S&P 500 return in the subsequent quarter was 3.2%, which is similar to the historical average for all quarters. is data suggests there is little evidence that low quarterly GDP growth is associated with short-term stock returns above or below returns in other periods.