In these times of volatile stock markets and sluggish economic expansion, you would be forgiven for expecting equally abysmal investment returns.
The circumstances certainly do not look good for growth, either for the investor or the economy as a whole. The Bank of England base rate has been locked at 0.5 per cent since March 2009 and the UK has dipped into recession twice in the past four years. And while economic expansion resumed in the third quarter of 2012, few can say with certainty that the economy will not falter again any time soon.
Making matters worse, the fallout from hurricane Sandy, which battered New Jersey and New York at the end of October, will without doubt have a negative impact on economic growth in the US.
Conventional wisdom suggests an economy performing at its best and growing at a healthy rate equates to strong stock market growth. It stands to reason that if a country is experiencing quick economic expansion, its financial markets will do the same.
Except this method of thinking is – as counter-intuitive as it seems – wrong. In reality, the data show little correlation between economic growth and investment growth. In fact, there are certain situations when the correlation is negative, meaning periods of fast economic expansion have resulted in poor stock market performance and vice versa for periods of slow economic expansion.
Gross domestic… prosperity?
Negative figures pertaining to the economy seem not to faze too many investment managers. Consider this – while the economy has dipped in and out of recession twice since 2008, the stock market has been on an overall upward swing, albeit with its fair share of bumps along the way.
Since 3 March 2009, when the FTSE All-Share hit its lowest level since the start of the financial crisis, falling to 1,781 points from more than 6,000 the previous spring, the market has made up most of those losses. For example, the index breached the 6,000-point mark on a few occasions in the past three years and, on 31 October 2012, sat at 5,182 points.
True, there have been plenty of dips along the way, but the long-term trend is for stock market growth and that is what investment managers see as the most important metric. Glyn Owen, investment director at Momentum Global Investment Management, says that, even though half of the past year was spent in recession, stock markets have been a positive story and are showing signs of long-term growth.
