GMO?s Ben Inker penned an excellent paper detailing the correlation ? or lack thereof ? between GDP growth and stock market returns. ?Inker not only concluded (via several linear regressions) that there?s no correlation, he adds that if there is one, it?s actually negative!
He discusses why the earnings yield on stocks has usually appeared greater than actual returns, and breaks down the contributor components on stock market returns (hint: dividends play a prominent role).
Inker and his GMO colleagues (which include Jeremy Grantham) believe stocks are now merely overvalued, which is an improvement from the obscene overvaluations we saw at the peak in 1999-2000. ?As a result they are anticipating a few more lean years of zero percent returns until valuations again regress to their historical mean.
Here?s the link to the full paper in PDF form:
GMO White Paper ? Reports of the Death of Equities Have Been Greatly Exaggerated:?Explaining Equity Returns
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