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Long/Short Investments in L/S Equity: Valuation and Ideas,

​How Long Can Stocks Continue to Rise with Anemic GDP Growth?

Chart of the S&P 500 over the past three months

The U.S. economy grew just 1.2% in the second quarter of 2016, well below the average 2.6% expectation. GDP grew 0.8% in Q1 2016 and 0.9% in Q4 2015.

The current stock market is buoyed, in my view, by money flowing out of fixed income markets into stocks, which provides the best hope for any sort of yield worth noting (if it’s positive at all in real terms), financial engineering matters such as stock buybacks, and a lack of business investment. But this is only sustainable for so long, as GDP growth is directly tied with domestic business performance.

Normal unemployment measures purportedly point to a robust labor market, yet the labor force participation rate is near historical lows, and an increasing number of jobs are part-time in nature in response to draconian compliance procedures (e.g., ACA) that work to disincentivize full-time hiring.

The Fed will also have difficulty raising rates due to the excess money in the system that’s met with too little loan demand.

Despite all this, stocks may still trend higher. With the government bond market flailing, investors’ return demand may slacken and continue to benefit equities as it has already. For those looking to trade on fundamentals and maintaining consistent return demands, the opportunities are looking to become consistently more sparse.