GDP Growth and Stock Market Returns

Many equity market commentators cite Gross Domestic Product (GDP) growth as an indicator of stock market prospects, and the financial media dutifully report advance, preliminary and final U.S. GDP growth rates each month on a quarterly cycle. Does GDP or any of its Personal Consumption Expenditures (PCE), Private Domestic Investment (PDI) and government spending components usefully predict stock market returns? Using quarterly and annual seasonally adjusted nominal (final) GDP data as available from the Bureau of Economic Analysis (BEA) during January 1929 through September 2010 (81.5 years) and contemporaneous levels of the S&P 500 Index (since 1950) and the Dow Jones Industrial Average (DJIA), we find that: (more…)