Say it with me: “GDP does not equal the stock market.”
Many investors look to GDP growth or contraction to assess market conditions. While this might seem logical, the data simply do not support a strong correlation between GDP movement and stock market performance. Why? Because the stock market is a forward-looking mechanism. By the time GDP numbers are released, market participants have already processed those expectations into current prices.
Wes Crill, PhD, and the research team at Dimensional Fund Advisors conducted an excellent study that highlights this disconnect.
Country Debt and Stock Returns
A relevant question for investors is whether periods of low quarterly GDP growth contain predictive information about short-term stock returns. The data suggest otherwise.
Consider the relationship between government debt, GDP, and stock market performance. In 2022, US government debt reached 121% of GDP—a figure that alarmed many investors. However, history shows little evidence of a strong relationship between high debt levels and poor stock market performance.
Since 1975, there have been 153 observations of a country exceeding 100% debt/GDP for a year. During these periods:
Stock markets in those countries delivered positive returns approximately two-thirds of the time.
Examples abound:
Italy and Belgium have exceeded 100% debt/GDP in over 30 of the past 48 years, yet their markets returned annual averages of 10.8% and 12.0%, respectively.
Japan’s debt has been over 200% of GDP since 2010, yet its market averaged close to 6% per year over that period.
This article effectively addresses the common misconception that GDP growth or contraction directly influences stock market performance. The combination of a logical explanation and data-backed examples from Dimensional Fund Advisors provides a compelling argument that helps investors focus on what truly matters for their portfolios. Below is a refined version, maintaining the original's clarity and intent while enhancing readability and flow.
GDP Does Not Equal the Stock Market
Say it with me: “GDP does not equal the stock market.”
Many investors look to GDP growth or contraction to assess market conditions. While this might seem logical, the data simply do not support a strong correlation between GDP movement and stock market performance. Why? Because the stock market is a forward-looking mechanism. By the time GDP numbers are released, market participants have already processed those expectations into current prices.
Wes Crill, PhD, and the research team at Dimensional Fund Advisors conducted an excellent study that highlights this disconnect.
Country Debt and Stock Returns
A relevant question for investors is whether periods of low quarterly GDP growth contain predictive information about short-term stock returns. The data suggest otherwise.
Consider the relationship between government debt, GDP, and stock market performance. In 2022, US government debt reached 121% of GDP—a figure that alarmed many investors. However, history shows little evidence of a strong relationship between high debt levels and poor stock market performance.
Since 1975, there have been 153 observations of a country exceeding 100% debt/GDP for a year. During these periods:
Stock markets in those countries delivered positive returns approximately two-thirds of the time.
Examples abound:
Italy and Belgium have exceeded 100% debt/GDP in over 30 of the past 48 years, yet their markets returned annual averages of 10.8% and 12.0%, respectively.
Japan’s debt has been over 200% of GDP since 2010, yet its market averaged close to 6% per year over that period.
Understanding the Disconnect
Stock markets set prices based on available information, creating an environment where investors expect a positive return given current conditions. Since government debt is a slow-moving variable, its effects are already factored into market prices. This explains why stock performance can remain positive even amid high debt levels.
Moreover, while GDP and debt levels are macroeconomic indicators, stock prices reflect the collective expectations of market participants about future corporate earnings, innovation, and productivity. These factors often operate independently of GDP growth or debt levels.
This chart highlights the lack of a meaningful relationship between government debt as a percentage of GDP and stock market returns across developed markets.
EXHIBIT 1
Indebted: General government debt, percent of GDP vs. stock market return for developed markets, 1975–2022
The Takeaway for Investors
The narrative that high government debt or low GDP growth spells doom for stock markets is not supported by historical data. Instead of relying on macroeconomic indicators like GDP or debt/GDP ratios, investors should focus on what they can control:
Diversification: Spread investments across asset classes and geographies.
Costs: Minimize fees to retain more of your returns.
Discipline: Avoid making decisions based on short-term economic headlines or market noise.
Stock markets are complex, forward-looking systems. By maintaining a long-term perspective and resisting the urge to react to macroeconomic data, investors position themselves for a more consistent investment experience.
FOOTNOTES
“General Government Debt,” Global Debt Database, International Monetary Fund, September 2023.
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