Economic growth, equity markets less connected than you think

Don't let macroeconomic numbers affect your investment decisions--except in certain circumstances.

Bryan Borzykowski 14 November, 2016 | 6:00PM

Canada's gross domestic product has been all over the map. Our economy contracted in the second quarter, but it's growing in the third. Despite these fluctuations, the S&P/TSX Composite Index is soaring, up 16.5% over the first 10 months of the year -- its best performance since 2010.

Why is our market roaring when our economy is not? It's because GDP growth and stock market gains have little to do with each other, at least over the short-term. In fact, if you look at the Canadian market and our economy over a two-year period, the correlation between the two is almost zero, says Brendan LaCerda, an economist with Moody's Analytics. "More recently, there's been a breakdown in the relationship between GDP and stock markets," he says.

Many proponents of top-down portfolio management love to talk about GDP and markets as if one has a direct impact on the other. You might hear this from emerging market managers, who often say the main reason to invest in developing nations is because of economic expansion. Yet one of the best-performing equity market so far this year is Brazil, which is in a recession. The MSCI Brazil Index is up by 49% year-to-date as of Oct. 31, while its economy is expected to contract by 3.3% in 2016, according to the International Monetary Fund (IMF).

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About Author

Bryan Borzykowski

Bryan Borzykowski  Bryan Borzykowski is a Toronto-based business and investments writer. He’s contributed to the New York Times, CNBC, BBC Capital, CNNMoney and several other publications. Bryan’s also written three personal finance books and appears regularly on CTV News.

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