Brace for impact?

An increase of stock market prices is only sustainable when it matches economic growth. Otherwise it’s pure speculation, and history has shown that ‘corrections’ inevitably happen. The stock market is like a game of musical chairs, everybody knows the music will eventually stops, yet nobody wants to be amongst the players sitting too early.

Economic growth doesn’t come from higher stock market prices, it comes from improved productivity. As product manufacturers and service providers become more efficient in utilizing resources, output increases. This is what the Gross domestic product (GDP) measures, the total output of the economy. A stock price increase is supposed to reflect its company becoming better at making money. Otherwise it’s only a bet that someone else will be optimistic (or stupid?) enough to buy it at an even higher price. The same way it’s not necessary to take a seat when you expect the other players to believe the music will keep playing longer than you believe it will.

Without much further ado, let’s look compare US stock market prices with the US GSP for the last 50 years:

See how stock market prices raised significantly faster than the GDP. Frightening, right?

But that’s a joke. The graph above would be true if GDP had grown 50% more than it really did. With real numbers, this thing is even much scarier, especially if we include the spectacular crashes of October 1987, June 2000 and October 2007: