The stock market has been ablaze in recent months, with the Dow Jones Industrial Average gaining more than 10 percent since early November 2012.
The Dow closed above 14,000 on Friday for the first time in more than five years.
Sure, it was just a number on a board. But it was enough to raise the hopes of some investors and cause others concern about an overheated market. And it brought reminders of a different era, back before the financial crisis rocked the world economy.
So the economy must be gaining headwinds, right?
Not according to the latest figures released by the Commerce Department Wednesday, which project a contraction in the nation’s GDP, or Gross Domestic Product, for the first time in three-and-a-half years.
The pieces of information don’t seem to fit together: A rising stock market and a shrinking economy.
Should we feel emboldened by a bullish market that the economy will continue to grow, or skittish that the GDP figures foreshadow another slip in our future?
“I think we’re going to continue to see growth over the next year, and this very slight drop in GDP growth will be looked at as an aberration,” said Alex Field, Professor of Economics at Santa Clara University.
Field attributed the fourth quarter drop in GDP to a combination of severe military cuts, weak exports and a pullback in inventory.
As for the robust stock market, Field cautioned against putting too much faith in the markets serving as an indicator of future growth.
“I don’t think that there’s a particularly strong correlation between week-to-week or month-to-month
changes in the stock market, and what’s happening in terms of GDP growth,” Field said.
After taking a look at the numbers, Field’s assertion appears correct.
Aside from the heart of the Great Recession, when the stock market and GDP both plunged, the data doesn’t show much, if any correlation between market optimism and economic growth.
In fact, more often than not large gains or drops in the stock market were accompanied by inverse changes in GDP.
For example, the biggest stock market swing of the last five years, excluding the recession, occurred when the Dow jumped 1,304 points between the third and fourth quarters of 2011. Yet instead of forecasting GDP growth, the sizable Dow climb was followed by a weighty drop in GDP of -2.1 percent in the first quarter of 2012.
Likewise, when the Dow plunged 1,082 points between the first and second quarter of 2010, the following quarter’s GDP grew by .4 percent.
NBC Bay Area asked CNBC Market Analyst Mary Thompson about the seemingly unpredictable relationship between the stock market and GDP growth.
“For that answer, I went to the experts,” Thompson said. “Last July, BNY Mellon actually published a paper on this [topic]. And said, indeed, there is no correlation between GDP growth from quarter-to-quarter or year-over-year, and performance of the stock market.”
For a better read of future economic growth, Thompson recommended looking at consumer spending, since it comprises about two-thirds of the economy.
Consumer spending rose a modest .2 percent in December, but a healthier .4 percent in November.
Thompson also pointed to signs of increased business investment and a warming housing market as key indicators of an improving economy.
“We’ve seen an improvement in housing,” Thompson said. “This is everyone’s biggest asset, for the most part. So as long as you feel you have value in your house, you tend to feel good about your financial situation.”