Question

1) The average return for large-cap stocks have been around 9 or 10 percent. This is in a period where GDP growth has averaged 3 percent. How is this possible that stocks can produce a multiple of GDP growth?

2) If the "new normal" for GDP growth is 2% (or less) what would be your long-term average of future stock returns? Why?

More interested in the answer to #2. Thanks.

Answer 1

Returns on the stock depends on the lots of parameters and Economy growth or GDP growth is one of them.

Stocks performance is mainly differ from sector to sector for e.g. for countries like India or those who has large import of Crude oil then if something happens and Crude oil prices goes up then the stocks of Oil or even Automobile companies stocks there, fall like anything.So crude oil prices hit the countries who are most dependent on it so the stock returns for oil industry goes down even if economy is performing good. But at the same time countries like India has huge IT industry and provide IT solutions to almost a world.So this IT stocks there outperforms the market or even the GDP growth.

So I'll say GDp is only a one parameter among many which affect the stock returns.

If GDP is less then short term average will definatly low but in long time period there are chances that market will correct itself and give better returns. So keep holding the stocks and focus on other parameters to get the stock returns.