Why the Economy is Not Relevant to Investing

I’ve always said if you spend 13 minutes a year on economics, you’ve wasted 10 minutes. Peter Lynch

Many investors believe there is some sort of cause-and-effect between the stock market and the economy. They think that if they can predict the general direction of the economy, it will help them predict the direction of the stock market and therefore their investments. However, the general direction of the economy is almost useless in predicting the stock market.

Studies (e.g. Dalbar study) consistently show that most investors buy and sell investments at the wrong times. One of the main reasons for this is because they base their decision on a mainly irrelevant factor – their outlook for the economy.

The media and professional investors very often make this same mistake. Articles about the stock market and presentations by investment companies and fund managers often include their outlook on the economy as a key part of their investment recommendations.

For example, recent articles claim now is a good time to invest because the economy is recovering from the recession, or that investors should be cautious now because of the risk of a “double dip recession”. Which one of these will happen and should this affect our investment decisions?

The usefulness of information about the economy for investing is vastly overrated. This is what we call “conventional wisdom” – something most people believe and that seems to make sense – but is false.

There are 2 main reasons why the economy is not really relevant to investing:

  1. The stock market forecasts the economy, not the other way around. The stock market is the head & the economy is the tail.
  2. Expectations of how the economy will perform are already built into the prices of stocks. (We will discuss this in the next article.)

The stock market is the head & the economy is the tail.

Let’s look at the facts. The best indicator of the economy is probably GDP (Gross Domestic Product), which is the total value of goods and services produced in a country. We calculated the correlation of GDP to the TSX60 from 1987-2010 and it is only 12%. This means that GDP and the stock market only move similarly 12% of the time.

Generally, correlations under 20% are considered “no correlation”. (Correlation of 100% means they move the same, -100% is negative correlation which means they move opposite to each other, and 0% means no correlation – that they move opposite as much as they move the same.)

For example, in 2008, the economy was fine, but the stock market crashed. In 2009, the economy was in a recession, but the stock market boomed (like it usually does during recessions).

Last year, I was asked quite a few times whether now is a good time to invest, given that it looks like it will be a bad year. My response normally was to ask: “Which one do you think will have a bad year – the economy or the stock market?” It is actually very rare for both to have a bad year at the same time.


* Data from Bank of Canada & Morningstar

There is, however, some correlation if you compare the stock market this year to GDP next year. This correlation is 33%, which is considered “low correlation”.

The reason that the stock market somewhat predicts the economy is that the prices of stocks include the future expectations of all investors in those stocks. This is confirmed by the Bank of Canada which uses the stock market as one of the key components of the “leading indicator”. This is a statistic published regularly by the Bank of Canada and used as a forecaster of the economy.

When investors buy an investment, the price they are willing to pay takes into account their expectation of how that investment will do. So, if investors are optimistic or pessimistic about the economy for the next year, that might affect the price they are willing to pay for an investment today. That is why the stock market somewhat predicts the economy.

A low correlation of 33% makes sense, though. The value of a company that is part of the stock market is normally a multiple of the profit of that company. If you talk to any business owner and ask them what affects the profit of their business, they will quickly rattle off a list of items – competition, taxes, available labour, new products, technology, cost cutting, the economy, etc. The general state of the economy is only one item in a long list of factors affecting profits.

In short, if we could accurately predict what the economy will do this year, then we have an indicator (only a 33% indicator) of what the stock market did last year. This is not really useful, since we already know what the stock market did last year!  :)

If we that want to know what the stock market will do this coming year, we would have to accurately forecast the economy 1.5 to 2 years from now. This is extremely difficult even for top economists to do.

So, I can settle the big debate. A “double dip recession” probably will not happen this year. How do I know? Because the stock market went up last year!

If we use the stock market for the last year as a predictor of the economy in the next year, then it looks like the economy is recovering like it always does after a recession, but possibly a bit more slowly.

A 33% indicator is not very useful. What good is an indicator that is only right 33% of the time???

You can predict the stock market more accurately by simply always predicting it will go up! In the last 25 years, the Canadian and global stock markets have been up 76% of calendar years and the US market has been up 72% of years. (Morningstar)


In short, the reason why the economy is mainly irrelevant is that, even if you could accurately predict the economy 1.5-2 years from now, it would only help you predict the stock market for this coming year 33% of the time. You can predict the stock market far better (75% of the time) just by always predicting it will go up.

Our experience from evaluating fund managers, as a broad generality, is that the more a fund manager talks about the economy, the worse investor he is!

The next time you read an article about the economy, remember that it tells you virtually nothing about what will happen to your investments. Just repeat to yourself: “The stock market is the head of the dog and the economy is the tail.” You can’t really tell where the head is going by studying the tail.

If you are an investor, stop wasting time trying to predict the economy. The economy is not really relevant to stock market investing. It is almost useless for predicting the stock market.

About the Author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com.  You can read his other articles here.

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Ed Rempel

Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.

Ed has written numerous articles to educate the public and his clients on his unique insights into strategies that actually work, instead of the “conventional wisdom” common in the financial industry.

Ed has trained more than 200 financial advisors and is considered the Smith Manoeuvre expert in the Toronto area. He has received accolades from Frasier Smith in his book “The Smith Manoeuvre” for customizing this strategy for hundreds of clients. His extensive experience in tax and finance has placed him in high demand. Ed’s team collaborates on each of their clients to help them create financial security and freedom.
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10 years ago

Trying to predict the future is always an exercise in futility. That’s what all these analysts are trying to do. I’m not sure that any amount of data will change this fact.

A further problem is that in hindsight people second guess themselves for not being able to predict the future because this or that indicator clearly showed there were problems while ignoring the indicators that showed the exact opposite.

The bottom line is that there is no such thing as a risk free investment and the only wrong move is not to save or invest. Unless you think you’ll enjoy eating cat food for your retirement years we have to use the system we have to accumulate funds. I’d rather have hotdogs and Kraft Dinner at least :)

10 years ago

If you took every economist from here to the moon, they still couldn’t reach a conclusion.

10 years ago

the stock market reflects (supposed to anyway) expectations about the economy… but is not always a good predictor…

your chart contradicts your conlcusions…there is a clear correlation between stocks & an economy albeit with a lag…

this correlation is extremely high in today’s globalized markets where the dependency on not just the developed economies but developing economies is important too – it is stupid to ignore where the global economy is heading and positioning yourself accordingly in the stock market…

here is some food for thought:


The Passive Income Earner
10 years ago

Predicting the economy is definitely futility as Rachelle says. I also don’t read as much in the economy for investing but I do for borrowing cost.

larry macdonald
10 years ago

I think the author would like to say the economy is of no use for predicting the stock market in the short term. That’s fine. However, over the longer run, stock prices rise because of growth in profits brought on by the economy. The economy is absolutely relevant to investing.

Chris Tringham
10 years ago

MDJ is one of my favorite blogs and I find great value in what Frugal Trader has to say. But this is clearly the worst post I have ever read on this website.

This Ed guy is smoking something illegal to come up with a viewpoint like this. I hope that his clients don’t lose too much money with this ridiculous logic. Please, FT, don’t put anymore of this guy’s thoughts on here.

Wow, reading this article again has left me speechless. The stock market is a futile effort to predict what the economy will do in the future. Why the hell did the stock market rally 80% but consumer confidence and spending stayed flat? Oh, let me guess, it’s because the economy is the “tail” and the market is the “head”. Absolute BS.

Tiny Potato
10 years ago

Great post. For long-term buy and hold investors economic projections are even more useless. Most projections focus on 1 or 2 years, which makes them even more irrelevant for stock holdings that we would keep in our portfolio for 5+ (even 20+) years!

10 years ago

What about using the economy and current news to predict which particular stocks are going to rise? You see that a car company is planning on using a new type of energy to power their inexpensive cars. Only one or two companies manufacture that energy or harvest it. So, you invest in that company, expecting the car company to make huge sales, making your stock rise subsequently. Is that a feasible situation in which you could “predict the future” of the stock market?

Ed Rempel
10 years ago

It’s interesting the timing of this article. The markets were down quite a bit yesterday and the reason given in the news was a lower forecast on the economy by the Fed.

We already have a good idea that the economy will recover slowly in 2011 because of the stock market so far in 2010. Why is anybody surprised?

Even though the economy is not relevant to investing, investors still react short term – for no reason. When the markets go down without a valid reason (some projection of the economy is not a valid reason), we consider that a bullish sign.


Ed Rempel
10 years ago

Hi Laura,

The situation you described is not really predicting the economy. It is just looking at the prospects for one company.

However, you should be aware that even if all of what you mentioned comes true, it could easily have zero effect on the price of the stock.

In general, any public information is built into the current stock price, so the current price may already assume the successful launch of the new car with the new type of energy.

The information you mentioned is probably irrelevant for predicting the price of that stock, since everyone knows it. If you want to figure out whether or not to invest, you need to do your own research to figure out if the public information is wrong. For example, if you think the new vehicle will be successfully launched, but will not sell quite as well as projected, then the price of the stock will likely fall.


10 years ago

I agree with you Ed, the most accurate prediction is that stocks will go up in the long term. I personally look forward to the gloom & doom forecasts, and the “economy jitters” like we experienced yesterday in the market. As a young investor I was excited to pick up many new positions back in May 2009. Not the very bottom of the market, but close enough to catch most of the gains.

The Biz of Life
10 years ago

As the old joke goes “Economists exist to make weathermen look good.”

As always, long-term stock market return = economic return + speculative return….. or economic growth + PE contraction/expansion. I agree with your premise that the average investor is better off just investing periodically and not fretting about the economy or trying to time the market based on economic forecasts. However, I’d argue that over the long-term market performance tracks economic growth.

10 years ago

I predict the US economy will get worse because of obama’s reckless policies. Why would anyone invest in a devaluing asset like the USD?

Let us hope the Canadian government does not follow the same reckless policies as the US, for the sake of our Canadian investments.

DIY Investor
10 years ago

To invest one does need to be optimistic long term. If you tell me that unemployment will average 10% over the next several years I’m not sure I want to be invested in stocks to any great extent, especially in the U.S.
Over the near term you are exactly right – forecasting the economy for other than one’s amusement is a waste of time. Ask Christina Romer!

10 years ago

One could argue that if we are in for a prolonged period of deflation (see Japan for last 20 years), with lower GDP levels, deleveraging, negative demographic trends etc taking their toll on the western world, then passive investing in “the markets” of these economies might not prove profitable for some time (if ever). Not to say some companies won’t be winners, it’s picking companies that can grow and profit in any economic situation that must take precedence.

Just food for thought, not trying to get all the indexers knickers in a knot :)

Balance Junkie
10 years ago

Ignoring the economy while trying to invest is like closing your eyes while trying to drive. I agree with Larry and Chris.

Ed Rempel
10 years ago

Hi Takloo,

You may see a pattern – a correlation with a lag in the chart, but it is only sometimes there. I calculated it and it is only 33% – pretty low.

Humans tend to see patterns that don’t exist everywhere. Look at the graph methodically.

Take a close look year by year and you’ll see that sometimes they move the same & sometimes they don’t. Then try it with the stock market 1 year ahead of the GDP. It’s still the same – sometimes it’s there, sometimes it’s not.

The economy is no help in predicting the stock market, and the stock market is only partly (about 33%) predicts the economy.


Ed Rempel
10 years ago

Hi Larry & Biz,

Believe it or not, even long term the economy is not really relevant to investing. I used to think there was no correlation short term, but long term a strong economy would lead to a strong stock market. However, that’s not true either, based on in-depth, long term studies.

This is the subject of my next article. Stay tuned…


Multiple Egg Baskets
10 years ago

I would argue that the relationship is more at the micro level for targeted sectors of the stock market. For example, I heard the analogy that if labour rates are low then there is an increase in hot dog sales and if labour rates are high then there is an increase in underwear and pantyhose sales.

10 years ago

Interesting post. Food for thought.

I agree with Echo- I look forward to the lows, equities are on sale! (Though it was hard for me to hardwire my brain to think in this Benjamin Graham way since 90% of other people think otherwise).

Ed Rempel
10 years ago

Hi Balance Junkie,

Good analogy. Looking at the economy while investing is like driving while looking in the rear-view mirror – or just staring out the side. But don’t think the economy has information about what is ahead of you on the road!

No economist predicted the crash. I don’t believe any economist predicted the recovery (even though it was obvious to people with general faith in the markets).

Economic stats are always about last month, last quarter or last year. Even IF the economy and the stock market were correlated, how would we get the 2011 economic stats now?

Studying the economy can help you understand what has ALREADY happened.


Ed Rempel
10 years ago

I was just watching Warren Buffett and Bill Gates talk to MBA students at Columbia University. Warren Buffett told them that the best year for investing he has seen in his life was 1954. The DOW was up over 50%, while the economy was in a recession.

Buffett said that it is a mistake to look at the economy and try to decide when to invest. Just look at the long term return you expect from your investments.

One part of the extraordinary success of Warren Buffett is that he completely ignores the economy (even though he has a degree in Economics). In our opinion, if he had looked at the economy as a guide for when to buy and sell investments, instead of just holding his investments forever, he would not have made his extraordinary wealth.


10 years ago

@ Ed Rempel – I think it’s obvious now that our generation will look back at 2009 as one of the greatest investing opportunities of our time. If one were to listen to the media and the economists at that time, maybe you keep your money under the mattress until all signs point to green.

It is extremely difficult to be a contrarian investor (psychologically), but with all of the noise out there it should be easier to identify times of greed and times of fear.

Balance Junkie
10 years ago

Ed – Actually, many people predicted the crash. Some of them were economists. While economic data is backward-looking, that doesn’t mean we have nothing to learn from it.

The current economic environment is one of excessive debt, complexity, and opaque, unregulated derivatives. It doesn’t take a PhD to see that this will not end well. And all you need is an intro stats course to know that correlation is not the same as causation.

Claiming that the stock market will rise 75% of the time is just as factually incorrect as the idea that the economy is irrelevant to the market. But I can see how it might help sell investments to unsuspecting consumers.

Ed Rempel
10 years ago

Hi Echo,

Right on. March 2009 was obviously possibly the best buying opportunity in our lifetime. Meanwhile, most economists are still very cautious now, while the stock market took off 17 months ago. All the noise from the media and economists makes it harder to just stay confident and buy in when there is irrational pessimism, like last March.


Ed Rempel
10 years ago

Hi Balance Junkie,

My point is that there is not correlation or causation between the stock market and the economy. The economy is still struggling and may or may not have lower growth for the next few years.

However, this is not relevant to the stock market. Most people mistakenly believe that if the economy is slow, then the stock market cannot do well. However, the stock market could still do very well in that environment.

For example, Europe has had growth barely over 1% for the last 25 years, but their stock market has still done well.

There is no causation or correlation between the economy and the stock market.


Ed Rempel
10 years ago

Hi Balance,

Why do you question the fact of the stock market being up 75% of the time? Of the last 25 years, the global and Canadian markets gained 19 years and the US gained 18 years. Most markets in most periods of time have similar pattern of gaining about 70-75% of years.

Generally, this holds regardless of what happens in the economy, whether there is a recession or growth, and regardless of whether the economy is growing quickly or very slowly. Just pick almost any major stock market and look through the gains and losses by year.


Balance Junkie
10 years ago


That may have been the case over the past 25 years, but it only makes it less likely over the next 25 years. The secular bull market ended in 2000 and a secular bear began at that time. So markets could show gains in any given year (like 2009), but those gains may be from very low levels (like in 2009) and say nothing about the total return for the market over time.

Markets have gone nowhere over the past 10 years if you followed a buy and hold strategy. That’s what a secular bear looks like. There can be a lot of ups and downs in between, but they ultimately resolve flat to lower.

I will agree that the relationship between the markets and the economy is tenuous at best, but that’s mostly a function of timing. As was the case for subprime mortgages, the stock market does not always acknowledge economic factors until they’ve been around for quite some time.

The problems that caused the last crash have only gotten worse over the past 2 years. Until they’re resolved, there is downside risk to equities. Ignoring those problems is likely to cause investors to lose money – again.

10 years ago

It can be argued that market leads the economy. In a world of more political turmoil than ever. In a world of more deficit spending than ever. In a world where governments are taking a path of more and more socialist spending. By our own hand we will see the economy crippled and beat up. Will it be able to survive? God knows and heaven help us. Welcome to Greece.

10 years ago

I give you 2 words why I disagree with this article: Peter Schiff

Ed Rempel
10 years ago

Hi Balance Junkie,

The markets being up 70-75% of the time holds for the last 200 years. It also holds in nearly every country. It is not a bull market phenomenon. It is a general stock market phenomenon.

I read a book by Mauldin talking about secular bear markets. We think they are a myth. When are they supposed to have happened???

We have the S&P500 data since 1871. Outside of the 1930s, the last 10 years is the only 10-year period ever with no gain.

When was there a secular bear?

In addition, the longer periods of no growth do not have the pattern you mentioned (other than perhaps 1929-42). They were periods that started or ended with a huge crash.

The 3 longest periods of no gain and pattern are:

1929-42: 14 years with no gain. Started with a 4-year crash from 1929-32 followed by a massive recovery from 1933-42

1999-2008: 10 years with no growth. There was a gain of 3.6% from 1999-2007. The 10-year period with no gain was just because it ended with a big crash in 2008.

1966-74: 9 years with no gain. There was a gain of 7%/year from 1077-72. The 9-year period with no gain was just because it ended with a big crash in 1973-74.

After that, the next longest period with no growth was 5 years, which happened a few times, all with minor losses only. The worst one was 1873-77 with a loss of 1.8%/year.

So, when was there a secular bear????

The book by Mauldin had several secular bear markets where the markets made nothing – if you subtract dividends and inflation. (Why would you subtract dividends and inflation? Who knows.) The “secular bear markets” were all periods of time that ended with high interest rates, which usually means P/E’s are lower. If you take the times that end with high interest rates and then subtract inflation and dividends from the stock market return, there is no gain. All that proves nothing.

We think that secular bear markets are a myth.

We are at the end of the 2nd longest period of time ever with no gain and there is pessimism everywhere. That’s what the start of great bull markets look like! For example, the last great bull market was 1983-99, which started in the middle of a big recession with pessimism everywhere.


Ed Rempel
10 years ago

Hi 50plusfinance,

Fortunately for us, the stock market is not correlated to the economy. Yes, the stock market partly leads the economy (about 33%), but mostly it’s just uncorrelated.

I understand all your concerns about the economy. In think governments are bad at spending. The money is mostly just wasted.

However, none of this necessarily affects the stock market. Believe it or not, if you look back at history, our stock market has generally performed better with higher government debt – and with slower economic growth.

There are so many misperceptions about the stock market.

If you look at US government debt as a percent of GDP, it was very high during WWII, then steadily went down. It was lowest during the 70s and 80s when there were several large bear markets. Then it rose and was the highest (until recently) during the 1990s great bull market.

Ken Fisher (fund manager and Forbes writer) thinks it is because of the leverage effect. In general, companies with higher debt (up to a point) generally grow faster.

Also, many studies consistently show that the stock market generally grows faster with slow economies. So IF we go through a few years of lower growth, that might be GOOD for the stock market. (More on this in the next article.)


Ed Rempel
10 years ago

Hi Clay,

I don’t know a lot about Peter Schiff, but one guy getting some predictions right does not disprove this non-correlation studies between the stock market and the economy.

Incidentally, did you notice that he predicted the economic crash, but his was wrong about the markets? He thought the US dollar would crash, but it shot up in 2008. He predicted the economy, but not the markets.


Balance Junkie
10 years ago

I assume you are talking about Mauldin’s Bull’s Eye Investing. I read it just before I fired my financial advisor and lightened up a lot on stocks. I lost nothing in the 2008 crash.

I would encourage readers to get a copy from the library and decide for themselves whether or not they “believe in” secular bear markets. Many of the things Mauldin predicted years ago have already come to pass. If he’s right, this secular bear won’t end until PE ratios are in the single digits. It might be another decade before that happens.

We are not in a cyclical recovery right now. We are in a post-bubble credit crisis recovery. Reinhart & Rogoff’s research in their latest book “This Time Is Different” warns that the economic (and stock market) trajectory is very different following a financial crisis rather than a normal recession. (I’ll have a review of the book up on Friday.)

If you want to know what can happen to markets after a real estate bubble pops, you can take a look at a chart of the Nikkei. The Japanese real estate bubble popped about 20 years ago. Their stock market is still 70% below its 1989 peak. Property values are still depressed in spite of decades of extremely low interest rates and massive government spending.

When the Japanese bubble popped, they had very little debt and a high savings rate. When the U.S. bubble popped, they had a ton of debt and a very low savings rate.

10 years ago


In your analysis of stock market performance you are not adjusting your numbers for inflation either and, as you noted in criticism of Mauldin’s book, why wouldn’t you? Well, if you did (http://www.dogsofthedow.com/dow1925cpilog.htm) you would see that:

– the pre-crash peak of 1929 would not be reached until after 1955 – 26 years later rather than 14 you stated without inflation adjustment

– the period after 1966 peak which you count as 9 years without gain is actually 29 years because in inflation adjusted terms there was an almost two decade long bear market and the same peak was not reached until 1995

– current stock market level is almost flat with 1966 peak which would make it a 40+ year period with no gain when adjusted for inflation

Also, picking specific stock market periods for justifying theories about its performance is as good an exercise as snake oil marketing – you could correlate stock market performance over the last 100 years with global warming:



Ed Rempel
10 years ago

Hi Balance,

Good for you. I figured after reading Mauldin’s book that if I followed it, I could avoid bear markets – and bull markets. It was very pessimistic, which is not what we see when we look at stock market history.

We have found that having faith in the market long term pays off. It allowed us to see the “Irrational Pessimism” in early 2009, which was probably the best buying opportunity of our lifetime.

Being fearful and focusing on avoiding bear markets tends to lead to either investing mistakes or underperformance. The biggest risks in stock markets are selling at the low and failing to buy at the low.

I don’t think Mauldin has the return of the stock market anywhere in his book. There are always deductions – stock market return less dividends less inflation and less MER. Of course the returns look bad once you subtract all that.

If you do that with bonds, they look horrible as well. Let’s take the return of bonds, subtract the interest payment, inflation and the buy/sell spread, then they lost money every single year.

The periods with single-digit P/Es result from high interest rates, not the end of a secular bear market. In his book, the 3 periods in the last 100 years with single-digit P/E end in 1920, 1932 and 1981. 1932 was the bottom of the biggest crash 1929-32, but the other 2 (1920 and 1981) were both periods of extremely high interest rates.

P/E ratios generally move opposite to interest rates, since the opposite (E/P) is the yield on stocks that is compared to the yield on bonds. We think that P/Es would go to single digits during extremely high interest rates, regardless of whether it was a bull or bear market.

That’s why we think “secular bear markets” are a myth. They are periods of normal market returns that end with very high interest rates. They appear to be secular bear markets only if you subtract dividends and inflation (which is high during high interest rates).

If you don’t believe me, read the book – but don’t let it destroy your faith in the markets long term.

It is very unlikely that this period of time is a mythical “secular bear” anyway, since interest rates are low (not extremely high).

Japan is an interesting comparison. Theories of the reason for their 20-year bear market are that they are not open to trade, prop up bankrupt banks, demographic issues, or the real estate crash (as you mentioned), but we think the main reason is that it followed their super-bubble.

It went from about 300 to about 40,000 in about 10 years. To give you an idea of the size, the Japanese stock market is down for 20 years a total decline of 75%, and yet still has an average return for the last 30 years of about 10%/year. The Japanese bubble was much bigger than the NASDAQ bubble of the late 90s, so taking a long time to normalize is not that surprising.

Markets tend to have reasonably good long term returns. They get far ahead or behind that long term return sometimes, but then tend to normalize again.

Before 2008, we were not in a bubble anywhere close to that size, so we don’t see our markets doing anything like Japan.

In fact, since 2000-2009 is the only 10-year period without a gain outside of the 1930s, it appears that we are behind the trend line. The late 1990s had above average returns so we were ahead of the long term normal return. Then the 2000s had very low returns, so we are now behind the long term normal return.

This, plus our long term faith in the markets, is why we are not afraid of mythical “secular bear markets” and why we are quite optimistic now.


Ed Rempel
10 years ago

Hi Max,

The DOW stats you show exclude both dividends and inflation. The base indexes don’t include dividends and the total return index figures are harder to find, so whenever you look at stock market returns, you need to be clear whether or not they include dividends.

Dividends have averaged about 5%/year in the last 100 years (they were much higher from 1900-1950) and inflation averaged about 3.5%. So, when you subtract this 8.5%/year from the actual stock market returns, then some periods don’t look good.

Who cares about returns less dividends and less inflation?

The longest periods of no gain in US during the last 100 years were only the 14 years from 1929-42, followed by 10 years from 2000-9, followed by 9 years from 1966-74. Outside of these 3 periods, the longest period with no gain since 1871 is only 5 years.

Longer bear markets are a myth.


10 years ago


So we agree on one thing – neither the numbers you provided nor the ones I did are adjusted for both dividends and inflation, and therefore don’t paint the true picture. What needs to be discussed is total real return – inflation adjusted stock market returns with dividend reinvestment. And the crux of the matter is not how long a bear market was but rather how long are the periods when stock markets produce no gains which you asserted as: “Outside of the 1930s, the last 10 years is the only 10-year period ever with no gain.”. (I could also argue that your logic – re: stock market dividend yield exceeding inflation on average over the past century – is not applicable to the study of bear markets as dividend yields get severely inflated when share prices decline but that’s a topic for a different conversation).

Although I’m no expert, it appears total real return data is widely available – “Global Investment Return Yearbook” (http://tinyurl.com/DMS2010) and SBBI – “Stocks, Bills, Bonds and Inflation” (http://www.investorsfriend.com/asset_performance.htm) both published yearly.

This data clearly shows four periods with no gain in total real return terms since the beginning of 20th century:

– 1909 to 1924 – 15 years
– 1928 to 1944 – 16 years
– 1966 to 1983 – 17 years
– 1998 to present – 12 years and counting

So not only “no gain” periods are regular occurrences, the stock market spent almost 60 years of the last 100 going nowhere in real terms! In fact if one were to draw conclusions from the above – however unsubstantiated and premature they may be – we are in for another three to five years of “no gain”.

It is also evident that during the periods above there were investments – for example, bonds or commodities – which outperformed the stock market in real terms and sometimes significantly so. The rest of the time of course the stock market appreciated massively.

Global Investment Returns Yearbook also has a decent summary of individual countries’ annual stock market growth in real terms which stands at 6.7% for US and 5.8% for Canada – impressive numbers but much lower than 10-12% often quoted by investment industry.


Ed Rempel
10 years ago

Hi xmax,

My reference to “periods of no gain” was the actual total return of the stock market, not subtracting inflation.

I understand your logic of subtracting inflation, but I find it completely distorts the story. The long periods of time without stock market growth are not up and down periods with no growth, as the believers in secular bear markets claim.

The long periods of time with no growth in stocks are periods of time that either start or end with a big crash, which recovers quickly, but there is a short period when it is lower than an earlier peak.

For example, the 1930s was not “14 years with no growth”. It was a huge drop for 4 years form 1929-32, followed by the biggest bull market in history. From 1933–36, the market tripled with an average gain of 31.2%/year for 4 years.

This massive bull market is in the middle of the “period of no growth” claimed by many. But how can a 4-year gain of 31.2%/year be considered a bear market? That period is in the middle of the cornerstone of all claims that secular bear markets exist.

The 1966-74 period was 9 years with no gain, but it is also not just a period of no growth. It was an ordinary 7-year period with a 7%/year gain, followed by a big crash for 2 years that dipped briefly slightly before the 1965 closing value.

Right now, we have 10 years with no growth, but that is also not the story. We ended 1999 at a hugely overvalued price at the peak of the tech bubble and then had a huge crash in 2008. The low of 2008 ended up below the bubble peak of 1999. That is the real story.

Up until 2007, returns were not bad. If you include both the tech bubble growth and the crash, from 1995-2007, there was a gain of 11.3%/year. Of course it is lower if you include the crash only and not the boom by going from 2000-2007.

However, the secular bear market believers claim it is an up-and-down no-growth market, which misses the story entirely. It is a boom-and-bust story that starts at the end of a boom and ends after a crash. That’s all it is.

The 10-12%/year claimed by the investment industry is fact. That is the actual return of the various stock markets over long periods of time. The 6-7%/year figures you showed are after you subtract inflation.

The 4 periods you mentioned are now, the 1930s, and 2 periods where inflation was extremely high but stocks performed fine.

The actual stock market return in the periods you mentioned are:

1909-24 7.1%/year
1928-44 4.1%/year
1966-83 7.6%/year
1998-present 2.9%/year

My point is that secular bear markets don’t exist. They may appear to exist when you subtract inflation, or inflation and dividends, from the actual stock market return. But that all misses the story.

There has never been an “up-and-down period with no growth”. All the periods claimed either start or end with a big crash that recovers very quickly, but the low after the crash dips just below a previous boom peak.


10 years ago


In an earlier response you wrote – “Why would you subtract dividends and inflation? Who knows.” – and yet in your last post you write – “I find it completely distorts the story” (about inflation). I’d like to understand a) why your opinion changed between the posts and b) what story you believe is missed by looking at total real return data (inflation adjusted stock market returns with dividend reinvestment)?

Your claim that all 4 periods with no stock market growth in total real return terms “start or end with a big crash” is also incorrect – neither 1909-1924 nor 1966-1983 had such crashes however their returns were destroyed by rampant inflation (ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt) and a 10% “actual total return”, to use your terminology, is actually a loss in real terms in a 13+% inflation environment! The other two periods did not start or end with a crash either – in fact both 1928 and 1998-2001 were one of the highest gain years in history however they were destroyed by subsequent crashes – 1929 + 1930 and 2001 + 2008 respectively. And as we all remember from 1998 to present there were 2 major up and 2 major down periods – so 1998-present is an “up-and-down period with no growth”.

The main point is that the duration of a bear market and as a result whether secular bear markets exist is an academic question. What is of practical relevance is the severity of the bear market and the duration of recovery or in other words how long it would take to return your original investment which as demonstrated above amounts to 60 years of no gain in total real return terms. And that of course goes to show that the claim of stock market having positive returns in any 10 years (with the usual exception of great depression period) is certifiably wrong.