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Yes, The Economy Matters To The Markets

It's well known that the financial markets aren't the economy. That is, the financial markets tend to anticipate and lead economic growth. But some people take this even further. For instance, this widely cited study by Credit Suisse showed that there was a negative correlation between economic growth and stock market growth. In fact, high growth economies often have the worst performing stock markets.

But there's more to the story than this. As Ben Inker noted in the latest GMO quarterly letter (see here), there is often an underlying reason why economic growth doesn't correlate with some stock markets:

"The biggest reason for this non-intuitive result is that the relationship between GDP growth and earnings per share (EPS) growth that most people assume must be there does not exist in the long run. The two developed countries with the strongest EPS growth between 1980 and 2010 were Sweden