The Stock Market Is Not the Economy

Why Main Street and Wall Street are 'disconnected'... More than 90 years of evidence... The stock market is not the economy... An enduring relationship of false signals... If the economy doesn't matter for stocks, what does?... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [Stansberry Digest] Why Main Street and Wall Street are 'disconnected'... More than 90 years of evidence... The stock market is not the economy... An enduring relationship of false signals... If the economy doesn't matter for stocks, what does?... --------------------------------------------------------------- It has been the No. 1 question of anyone who follows the markets even just a little bit... Why has the stock market continued to rise over the past year – while the economy has been so weak? Last year, America's gross domestic product ("GDP") shrank by 3.5%. That's the largest decline since World War II. (And in the second quarter of 2020, GDP fell by 31% on an annualized basis... the worst quarterly performance since the Great Depression.) Meanwhile, the benchmark S&P 500 Index is up about 75% from its March 2020 lows. And higher stock prices are not just an American trend... The global economy shrank an estimated 4.3% last year, while the MSCI World Index is up around 75% from its lows, too. The Great Disconnect between Main Street and Wall Street isn't unprecedented... It's just that in the past year, it has reached new heights (or lows, depending on how you're looking at it). In today's Digest, I (Kim Iskyan) am going to explain this disconnect between Main Street and Wall Street... I'm going to get into the real story of the relationship between the economy and the stock market... It includes details like how technological advancement helps consumers but usually doesn't help shareholders... how Apple (AAPL) today isn't like how General Motors (GM) was in the 1950s... and what investors should really look at when putting their portfolios together. First, though, I'm going to take time to bust an enduring market myth... It's right up there with "carrots are good for your eyes" in terms of longevity – and as dangerous as "sure, touch that third rail, it won't hurt you" for giving investors a false sense of security. It seems logical that economic growth and the stock market would move together... On the surface, this sentiment is as reasonable as two plus two equals four... As GDP (or total economic output) shrinks like a candle in a bonfire, demand for companies' services and products drops. With lower revenue, companies' margins collapse and earnings decline. As a result, share prices drop. And if this is true for enough companies, the stock market as a whole could decline in value. And it's reasonable to think that the opposite is true, too. As the economy accelerates, demand for products and services rises... along with revenues, margins, and earnings. As a result, share prices rise, lifting the stock market. But it's not that simple... The mainstream financial media fuels the perception that "growth" and "stocks" are as tight as Batman and Robin... You will often see a headline suggesting that the Great Disconnect between these concepts now is somehow unnatural – like beef that tastes like chicken, or wearing socks with sandals. The Financial Times frowned in April last year...  None of it made sense, the Economist contended in May...  A Money magazine article demanded indignantly in January 2021...  And it's not just the media... Financial professionals fall back on the easy "if-then" of economic growth and rising stocks (and vice versa), too. Capital Group is one of the world's largest asset managers, with $2 trillion under management. And in a recent report, it set forth arguments for why stocks in developing markets may rise in 2021. The first reason cited in the report was that emerging economies are enjoying a "swifter economic recovery" – which would thus push up stock prices. Though the Capital Group is hardly alone, it's particularly disappointing when people who should know better promote a notion that's just factually incorrect. The authors of the Capital Group piece boast that they have a combined total of 91 years of investment experience, but they sure don't seem to understand this fundamental of investing... It's simply not true – Wall Street and Main Street aren't (positively) correlated... The idea that economic growth is good for the stock market – or that a shrinking economy is bad for shares – is a giant lie... Said another way, it's a the-moon-is-made-of-blue-cheese argument of investment research. Here's what I'm talking about... and what you should consider the next time you think about why stocks are going up when the economy is so bad (or the other way around). Jay Ritter, a finance professor at the University of Florida, analyzed GDP growth and stock market performance from 1900 through 2011 in 16 countries that account for around 90% of total global market capitalization (that is, the value of all traded stocks). He was, in part, looking for a correlation between economic growth and stock market performance. Allow me a brief refresher here to set the scene... Correlation is the relationship between two or more assets. It measures what generally happens to Asset A when Asset B's price changes – although there's no direct causation necessarily implied. A correlation coefficient of 1.0 means that when one asset (or variable) goes up, the other asset goes up with it. A correlation coefficient of negative 1.0 means the opposite – that two assets are perfectly negatively correlated (that is, when one asset goes up, the other goes down as much). And a correlation of zero means that no relationship exists at all between how the two assets move. Ritter found that over 91 years, economic growth and stock returns were not positively correlated... That is, they didn't move in the same direction. And in fact, they were negatively correlated. For developed markets – like the U.S., Spain, or Australia – over the full period he analyzed, Ritter calculated a correlation coefficient of negative 0.39. And for emerging markets from 1988 to 2011, the figure is negative 0.41. Now, I've spent most of my career focused on emerging markets – from Latin America in the 1990s, to the former Soviet Union and Eastern Europe, and later in Asia. And throughout three decades, the mantra of "high economic growth will drive stock markets" in investing circles became as familiar as a favorite pair of shoes. But I – and pretty much every other emerging-markets analyst I've ever come across – was wrong... A study by asset-management firm Verdad Capital, confirms it. From 1989 to 2020, the S&P 500 has returned an average of 10% per year, compared to 8.7% annually for the MSCI Emerging Markets Index. That might sound like a small difference... but thanks to the magic of compounding, it's the difference between $100 invested in 1989 turning into $1,890 for the S&P 500... or just $1,340 for the emerging-markets index. And here's the kicker... Over that period, emerging-market economies grew by 4.7% per year, while the U.S. economy has grown by an average of just 2.3% per year since 1989. Higher growth in emerging markets hasn't helped their stock markets at all – especially compared to the lower-growth economy (and better-performing stock market) of the U.S. As Ritter concludes in his research... This means that investors would have been better off investing in countries with lower per capita GDP growth than in countries experiencing the highest growth rates. There's no particular reason why economic growth and the stock market should move together... As Bloomberg explained in June... There has never been a reliable relationship between equities and GDP... the stock market is not a barometer of the country's health – politically, socially, or even economically. Its sole function, as wonky as it may sound, is to quickly, accurately, and unemotionally tabulate investors' consensus view about the health and prospects of publicly traded companies. Another way of thinking of it – to borrow from the 1934 classic investment text Security Analysis, by famed investors Benjamin Graham and David Dodd – is that in the short run the stock market acts like a "voting machine"... It reflects transitory news, irrational attitudes, knee-jerk emotions and half-baked expectations. It doesn't reflect the economy (or anything else, for that matter). Part of the reason why economies and stock markets move in opposite directions, Ritter explains, is that what's good for the economy may not necessarily be good for shareholders – and vice versa. Economic growth is the result of two inputs – investment and labor... For an economy as a whole, higher levels of investment (capital) and labor will result in higher economy-wide earnings and economic growth. What matters for shareholders of publicly traded companies, though, is growth in earnings per share and return on equity – or how much of shareholders' capital is used, and how efficiently it's used. Ritter explains that when an economy is growing, companies often become overly optimistic – and more concerned about losing market share to competitors. As a result, they tend to funnel excess profits into projects and efforts that (in leaner times) they wouldn't pursue. These bad-idea investments boost the economy as a whole. But they don't help shareholders. For example, digging a hole and filling it in will boost economic growth (ditch diggers get paid and bulldozers are purchased). But the shareholders of public companies that dig big holes and fill them in – or say, overpay to acquire a competitor, construct a new headquarters so extravagant that it would make Frank Lloyd Wright blush, or move into a sector where they have no insight on – will suffer at the altar of capital destruction. Shareholders won't see any increase in earnings from the poor allocation of excess capital. Instead, they'll be lucky if earnings don't fall. Over the long term, Ritter says, those companies that boost dividends are often the better bet. These are the capital-efficient companies that our editors love so much and you've read about in the Digest... They return profits to shareholders, rather than spending it on capital-destroying investments. Technology benefits consumers – but not companies... In addition to labor and capital, technological improvements drive economic growth, too, and bring about cost savings and greater efficiency. But for the most part, those savings benefit consumers, rather than companies and their shareholders. That's because it doesn't take long before everyone is using the same new technology – and competition prevents companies from having permanently higher margins thanks to technological advances. An important exception, of course, is trailblazing companies in the technology sector that crush all potential competitors, like Amazon (AMZN)... or are de facto monopolists, like say, Facebook (FB) or Alphabet (GOOGL)... or have created a unique product ecosystem like Apple. But for most everyone else, once (for example) every retailer offers online ordering and overnight delivery, no retailer is able to charge consumers more – or generate higher profits – from online ordering and overnight delivery. The agricultural sector shows us more clear examples... History-altering technological advances – like improved seeds, more efficient farming equipment, and fertilizers – have resulted in extraordinary improvements in agricultural output. While 150 years ago, the majority of the labor force in Europe and North America was engaged in agriculture, today just a few percent of workers are involved in farming – and there is still plenty of food to go around. As Ritter explains... Have the owners of farmland [or shareholders of farming companies] gotten rich [thanks to these improvements]? The answer is no... The increase in agricultural output has been so vast that the benefits have accrued almost entirely to the consumers of food. Standards of living have improved because of the vast number of workers who now produce output in other sectors of the economy instead of the agricultural sector. Similarly, innovations over the past 60 years have turned air travel into a fast, cheap, and safe way for billions of people to traverse the Earth... boosting business and quality of life. And growth in the airline industry – and the travel industry – have been important drivers of GDP. But while consumers have enjoyed the fruits of advances in air travel, happy investors in the airline industry – an infamously cyclical and capital-destructive sector – are few and far between. As legendary investor Warren Buffett famously wrote in 2007... If a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down. In other words, what's good for the economy – and consumers – may not help companies or their shareholders... In fact, what's good for the economy can be lousy for shareholders – and the other way around. What's more, companies in the stock market aren't representative of the economy as a whole... A paper recently released by the National Bureau of Economic Research ("NBER") entitled "Have Exchange-Listed Firms Become Less Important for the Economy?" highlights the underlying disconnect between Main Street and Wall Street... In other words, the big companies in the stock market matter little to the everyday economy. It used to be that "What's good for General Motors is good for America." (Charles Wilson, the head of the automaker, actually said in 1953, "For years, I thought what was good for our country was good for General Motors, and vice versa"... but the sentiment is similar.) Back then, GM was the U.S. company with the largest market capitalization. And it accounted for nearly 1.4% of total U.S. non-farm employment. But today, the biggest company by market cap, Apple, employs just 0.1% of all working Americans. And it's difficult to imagine Apple CEO Tim Cook suggesting that what's good for Apple – and its shareholders – is good for the U.S. as a whole. The NBER study found that the percentage of total employment at publicly traded companies as a share of total non-farm employment in the U.S. has fallen from 41% in 1973 to 21% in 2019. What's more, there's no particular reason for the stock market to be highly representative of the economy as a whole (and there are lots of reasons why it isn't). Companies have different motives to list on the stock market – while it doesn't suit many others. And a company's market capitalization reflects the value of a firm for its shareholders – which by no means is correlated with a firm's contribution to employment or GDP. In sum, what's good for the largest American companies today has, at best, an indirect relationship to what's good for the economy. Stocks have been rising – despite the worst economic backdrop since the Great Depression – because the link between Wall Street and Main Street isn't just tenuous... There's no particular reason to think there should even be a connection at all. So why is the S&P 500 up about 75% since last March? First, corporate earnings weren't so bad last year. Remember, as shareholder of a company – which is what you are when you buy a stock – you're in essence "buying" a stream of future earnings, and dividend payments, of the company. (That stream is worth more if earnings are rising... and less if they're falling.) Dire headlines in 2020 obscured the reality that publicly traded companies didn't have such a bad year, considering how much of a dumpster fire it was for the global economy. According to Yardeni Research, the earnings of companies in the S&P 500 declined by 13% in 2020. That's not a small decline – in 2009, at the end of the global financial crisis, earnings fell 7%. But in March 2020, investors were anticipating nothing short of global economic Armageddon... That's why the S&P 500 fell 34% in just five weeks in February and March last year. That leads us to another reason why Wall Street hasn't followed Main Street down... Markets look forward. This is an idea we've highlighted via True Wealth editor Dr. Steve Sjuggerud in the Digest before. Earnings forecasts are an important ingredient of how markets look forward – because they suggest whether those all-important earnings streams are getting bigger or smaller. According to Yardeni Research, the consensus forecasts expect S&P 500 earnings to rise by about 23% this year – lifting them well above 2019 levels (before COVID-19). And forecasts call for earnings to jump another 15% in 2022. However, in the same way that the stock market and the economy don't move together, the fact that the stock market is forward looking doesn't mean it can predict where the economy is going. The stock market is full of false signals of recession, or periods of growth... As economist Paul Samuelson joked in 1966, "The stock market has forecast nine of the last five recessions." There's a lot of money chasing stocks in this "Melt Up"... Ultimately, shares are like anything else – from chickens to baseball cards to BMWs – in that their price moves up when there's more demand (buyers) than supply (sellers). Everything that a bookshelf-full of investment-analysis books will tell you about how to value a stock – from management to strategy to balance-sheet strength to valuation – can be trumped if there's enough cash vying for a scarce asset like shares of a company. And right now, there's a lot of cash creating what could be what [my colleague Dan Ferris has discussed]( as potentially the "Mother of all Melt-Ups"... The Federal Reserve has been pumping money into the American economy at an unprecedented pace to reverse its contraction, and to soften the blow of higher unemployment. Today, Congress is on the verge of approving another $1.9 trillion of COVID-19 economic stimulus... A lot of that money is earmarked for various purposes – like small business loan forgiveness, personal protective equipment for schools, and COVID-19 testing. And of course, much of it is in the form of direct payments to individuals... and plenty of that leaks out at the edges. All those Robinhood speculators with their stimulus cash burning a hole in their brokerage accounts are a source of enormous demand. When there's liquidity, stocks rise. So if the economy doesn't directly influence stock prices, what does? The thing is, the dichotomy between the stock market and the economy is not unreasonable. It's not wacky and ridiculous. And it shouldn't be surprising at all. As the New York Times explained in April... Whenever you consider the economic implications of stock prices, you want to remember three rules. First, the stock market is not the economy. Second, the stock market is not the economy. Third, the stock market is not the economy. And as Ritter concludes... Future economic growth is largely irrelevant for predicting future equity returns. This is because long-run equity returns depend on dividend yields and the growth of per share dividends. The best investments are made in companies that use their cash wisely... Companies whose efforts yield a worthwhile return on equity or who return capital to shareholders are the best investments. These are the companies that we at Stansberry Research have long recommended... We love recommending shares of businesses that enjoy generous amounts of free cash flow and reinvest smartly in their companies. Our founder Porter Stansberry recommended a lot of these companies in March 2020, when he unveiled his Forever Portfolio. In a lot of ways, it was a culmination of his life's work. We talked about some of these companies in the Digest last spring and over the last year – like [Coca-Cola (KO)]( and [Starbucks (SBUX)]( capital-efficient companies that sell addictive products. In one of his classic essays, originally published in 2012, Porter wrote about Coke in particular and the company's place in the hearts and minds of so many happy customers... Such a reputation creates a consumer franchise that allows the value of the product to the purchaser, rather than its production cost, to be the major determinant of selling price... That's the whole magic. When a company can maintain its prices and profit margins – because of the value placed on its product by the purchaser, rather than its production cost – that business can produce excess returns... returns that aren't explainable by rational economics. Those, my friend, are exactly the kinds of companies you want to own. In environments like today, when inflation fears are rattling the stock market, these timeless words again take on timely meaning for all investors. The companies that can make the most of their dollars are positioned to reward shareholders the most. That's what many new investors don't understand. Instead, they're looking at the economy. So, if it wasn't clear already, here are my final words... Forget about the economy. Buy great businesses instead. --------------------------------------------------------------- Recommended Links: ['If I had to put ALL my money into ONE stock, this would be it']( Analyst goes on record: "This is it: the No. 1 stock to buy today." He thinks this ONE stock could triple quickly... and return 1,000% gains long term... and do it with LESS risk than most stocks out there today. [Get the critical details here](. --------------------------------------------------------------- [DOUBLING DOWN: The Case for $250k Bitcoin]( First, it was MicroStrategy. Then Tesla. Soon, every company in the world will own some bitcoin. And now, the most trusted currency expert in America says, "I predicted $100k bitcoin... but I was WRONG... because honestly, I think it could realistically hit $250,000!" He's agreed to come forward and share details on the unique crypto strategy that led to 27 winning positions last year with average gains of 360%. [Don't miss out – click here for details](. --------------------------------------------------------------- New 52-week highs (as of 3/8/21): Automatic Data Processing (ADP), American Financial (AFG), American Express (AXP), Liberty Braves Group (BATRA), Brunswick (BC), Berkshire Hathaway (BRK-B), Blackstone Mortgage Trust (BXMT), Colony Capital (CLNY), Comcast (CMCSA), Disney (DIS), Enstar (ESGR), Forum Energy Technologies (FET), Comfort Systems USA (FIX), Ingersoll Rand (IR), SPDR S&P Regional Banking Fund (KRE), LGI Homes (LGIH), Manchester United (MANU), Altria (MO), MasTec (MTZ), VanEck Vectors Oil Services Fund (OIH), Invesco High Yield Equity Dividend Achievers Fund (PEY), Invesco Dynamic Oil & Gas Services Fund (PXJ), Suncor Energy (SU), Texas Pacific Land Trust (TPL), Travelers (TRV), Trane Technologies (TT), Ulta Beauty (ULTA), U.S. Concrete (USCR), Visa (V), and W.R. Berkley (WRB). In today's mailbag, more feedback on [Dan's Friday Digest](. Tell us what's on your mind by sending an e-mail to feedback@stansberryresearch.com. "Dan, you hit it out of the park with that Digest. "Wow, ARK funds down that much is amazing. It seems like that kind of 'correction' can't overcome the leverage factors. That's my judgment. Considering the magnitude of margin, it seems likely this bull is over and it's not even down all that much... "You know... I like your frank calls; love 'em. I missed the 'COVID' correction and now I missed this one. I'm happy as a lark. No one else has the guts to make those calls and they do their clients an extreme injustice. Stocks may be back up for a while but this damage to ARK funds is going to be a game changer in my opinion. I'm supposing that there is also significant damage to the entire stock market and the Reddit/Robinhood crowd." – Paid-up subscriber Al M. Good investing, Kim Iskyan Dublin, Ireland March 9, 2021 --------------------------------------------------------------- Stansberry Research Top 10 Open Recommendations Top 10 highest-returning open positions across all Stansberry Research portfolios Stock Buy Date Return Publication Analyst ETH/USD Ethereum 12/07/18 1,336.7% Crypto Capital Wade BTC/USD Bitcoin 11/27/18 1,284.9% Crypto Capital Wade POLY/USD Polymath 05/19/20 1,010.2% Crypto Capital Wade CVC/USD Civic 01/21/20 922.4% Crypto Capital Wade MSFT Microsoft 11/11/10 797.5% Retirement Millionaire Doc BNB/USD Binance Coin 09/17/19 772.1% Crypto Capital Wade MSFT Microsoft 02/10/12 683.1% Stansberry's Investment Advisory Porter DSLA/USD DSLA Protocol 12/15/20 668.2% Crypto Capital Wade TRB/USD Tellor Tributes 04/21/20 648.9% Crypto Capital Wade ADP Automatic Data 10/09/08 629.6% Extreme Value Ferris Please note: Securities appearing in the Top 10 are not necessarily recommended buys at current prices. The list reflects the best-performing positions currently in the model portfolio of any Stansberry Research publication. The buy date reflects when the editor recommended the investment in the listed publication, and the return shows its performance since that date. To learn if a security is still a recommended buy today, you must be a subscriber to that publication and refer to the most recent portfolio.  --------------------------------------------------------------- Top 10 Totals 7 Crypto Capital Wade 1 Retirement Millionaire Doc 1 Stansberry's Investment Advisory Porter 1 Extreme Value Ferris  --------------------------------------------------------------- Stansberry Research Hall of Fame Top 10 all-time, highest-returning closed positions across all Stansberry portfolios Investment Symbol Duration Gain Publication Analyst Band Protocol crypto 0.32 years 1,169% Crypto Capital Wade Terra crypto 0.41 years 1,164% Crypto Capital Wade Inovio Pharma.^ INO 1.01 years 1,139% Venture Tech. Lashmet Seabridge Gold^ SA 4.20 years 995% Sjug Conf. Sjuggerud Frontier crypto 0.08 years 978% Crypto Capital Wade Nvidia^ NVDA 4.12 years 777% Venture Tech. Lashmet Rite Aid 8.5% bond  4.97 years 773% True Income Williams PNC Warrants PNC-WS 6.16 years 709% True Wealth Sys. Sjuggerud Maxar Technologies^ MAXR 1.90 years 691% Venture Tech. Lashmet Constellation Brands STZ 5.45 years 631% Extreme Value Ferris ^ These gains occurred with a partial position in the respective stocks.  You have received this e-mail as part of your subscription to Stansberry Digest. If you no longer want to receive e-mails from Stansberry Digest [click here](. Published by Stansberry Research. You’re receiving this e-mail at {EMAIL}. Stansberry Research welcomes comments or suggestions at feedback@stansberryresearch.com. This address is for feedback only. For questions about your account or to speak with customer service, call 888-261-2693 (U.S.) or 443-839-0986 (international) Monday-Friday, 9 a.m.-5 p.m. Eastern time. Or e-mail info@stansberrycustomerservice.com. 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