Why the Stock Market-Economy Correlation is a Myth

Stocks on the Rise

According to 90 years of data, there is no stock market-economy correlation. You’re better off going by the charts. And these three look good.

I wanted to start today with a few words about something I’m seeing a bit more in the headlines these days: That 2021 could bring some of the fastest economic growth in decades. Some economists think the year will bring north of 5% GDP expansion (Goldman Sachs thinks it could be 8%!) thanks to the re-opening/vaccine factor, another stimulus bill that passed, a Federal Reserve that’s determined to remain loose and a possible infrastructure bill, too.

That’s obviously good news for the stock market. Or is it? Is there really a stock market-economy correlation?

No. It turns out the market isn’t really linked to GDP growth at all—oftentimes they move in the opposite direction, as they did last year. I’m not a statistics guy, but Bloomberg had an article last June that looked at the correlation between GDP growth and equity returns on a year-by-year basis. A reading of 1.0 means the two would be fully in line; a reading of -1.0 would mean they move perfectly in opposite directions; and a reading of 0.0 means no correlation at all.

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Get this: From 1930 to 2019, the correlation between the economy and the stock market was … 0.09. And when looking at rolling 10-year periods, the stock market-economy correlation was actually -0.04—both basically saying there’s no correlation.

Why is that? Part of it is because the market looks ahead, and part of it is because the market trades on investor perception, and is thus subject to other factors like interest rates, war/peace, inflation, taxes and the like.

Don’t get me wrong—I’m longer-term bullish on the market, but it’s not because of any insights I have into the economy over the next few quarters. Instead, it’s due to some key price/volume things I’ve seen during the past few months, such as the blastoff-type indicators last November (those usually have a shelf life of a year or so) and the myriad longer-term (one- to five-year) breakouts late last year that should bode well down the road.

But the economy? You’re better off letting others guess about it. As always, your best clue to the market’s next move is the market itself.

Waiting for an Uptrend

So what is the market telling us? Let’s examine the evidence.

Right now, we’re about seven weeks into the downturn for the Nasdaq and growth stocks. On the plus side, now that some time has passed, I am seeing more potential setups—stocks that have built launching pads for two or three months and look ready to go. If all goes well, I could see things futzing around for another two or three weeks … and then earnings could be a catalyst for some powerful breakouts.

But right now, I still see the onus being on the bulls—a ton of former leaders are still coughing up blood, the number of stocks hitting new lows is too elevated for comfort and I’m put off by the fact that investor sentiment hasn’t cooled off much. In a sense it’s like the opposite of a year ago.

That doesn’t mean I’m expecting doom (as written above, I remain quite optimistic about the market’s big-picture outlook in the next few months), but I continue to think less is more in this environment, especially with growth stocks. Trying to force it will likely lead to more pain and frustration.

Instead, it’s best to cool it and let everyone else fight it out while waiting for the next sustained uptrend. As always, I’ll just take it day to day and see what comes.

3 Growth Stocks I Like Right Now

In the meantime, I’m building my watch list. One type of stock I’m looking for is obvious—growth names that are holding up best or, ideally, have already broken out on the upside.

The best example here is Applied Materials (AMAT), the chip equipment giant that’s been posting giant growth and whose stock leapt out of a five-week zone (part of a larger 15-week ascending base, if you’re into that sort of thing) and, importantly, has been holding those gains.

Applied Materials (AMAT) is evidence of the lack of stock market-economy correlation.

But another thing I like to do is to flag any stocks that have flashed some major buying volume clues because of big news (usually earnings, though it could be an acquisition or something else). Shockwave Medical (SWAV), which has a new and improved way to treat atherosclerosis (narrowing of arteries via plaque buildup). The firm just upped guidance and gapped back to its 50-day line earlier this week.

And then there’s old friend Chewy (CHWY), the online seller and distributor of all sorts of pet food and supplies, which topped earnings estimates Wednesday evening and gapped higher on Thursday, though the stock is still sitting well below resistance.

Chewy (CHWY) is evidence of the lack of stock market-economy correlation.

It’s not so much that these stocks are buys right now—until the market proves itself, things are likely to remain choppy and challenging. But even if you never buy AMAT, SWAV or CHWY, they’re likely to provide some good feedback: If all of them get smacked lower in the days ahead, it’ll be confirmation that the environment really hasn’t changed much.

Conversely, though, if these names can hold their recent gains and/or build on them, it would be an initial indication that the sellers are beginning to run out of ammo. All three are worth watching.

Michael Cintolo

Your Guide to Winning Growth Stocks

Michael Cintolo is a growth stock and market timing expert. His Cabot Growth Investor, with its legendary Model Portfolio, is recommended for all investors seeking to grow their wealth.

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  • Wayne H.

    Interesting. But most of the market’s out-of-sync (sometimes even berserk) action is explainable by its being a leading indicator. It is looking 6-9 months ahead, as a rule, and I do not recall any time the trend has been wrong.

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