There is much pessimism on the site about the stock market. One thing I always like to ask is suppose it were true that the economy is really going to be weaker than people expect. Like we'll have 1 or 2% growth rather than 2 or 3. Why should this affect stock prices? What is the evidence that stocks do worse during periods of below average growth? Why should it matter? How does the rate of return on capital of businesses compare to the 30 year rate as stocks are valued based on discounted value of expected future earnings adjusted for risk, with the growth rate of earnings being determined by the rate of return on capital less the pay out on dividends rate. Is it better to buy stocks when people are pessimistic or optimistic?

All these things must be tested. I'm not saying that I'm bullish or bearish on stocks or that one should be. I'm just questioning the glue and the weakness type of stuff. Assuming it was true, which I doubt, why should that be bullish or bearish? Testing is required.

Steve Ellison writes: 

A regression of the 1-year S&P 500 return from 1981 to 2010 against the US unemployment rate reported the previous December shows a 16% positive correlation, with the regression line for the next year's S&P 500 net change being -1.9% + (1.9 * unemployment rate).

t=0.86, p=0.40

Leo Jia writes: 

I often ask myself similar questions but can not answer them. Perhaps one has to answer this question first: what percentage of the people in the market are rational? Or rather, what percentage of the money in the market is rational? Though I don't have an answer, I tend to believe that there is more irrational money than rational money in general. The clear problem is that the degree varies all the time.

J.T Holley writes: 

With the std dev of 18% and annual rate of 8-9%, I'll order a double helpin' of "drift" with a side of "thank you".

If that meal doesn't fill you up then you must question where you get your meals and disregard the gratuity the next time you sup.

Tim Melvin writes: 

Drift only exists if you have a 100 year time frame in my opinion. See 1970s and 2000 to present. Much of investing success last fifty years for most investors is result of membership in lucky sperm club.

Craig Mee writes: 

Doesn't one new variable in a mix during the testing period influence the outcome– QE, no QE, etc etc…(sure, there's been other ways of doing it). But how to judge what has the over riding influence on the outcome? This could vary under certain conditions. How much of the US equity recent rise is in default of Europe, just like EURGBP taking the heat…and how much of the current price is underpinning based on QE to come?

What has recent price action illustrated, if anything at all…

How should weaker growth effect share prices? I would argue that this would just be a further nail in the coffin, when all the ducks are lining up, but how can we say it's got more weight currently than some other significant half ? It's tough. Are the number of running variables any different than twenty years ago? Maybe not. Are market conditions, HFT, leverage, number of participants in the market any different? Certainly. Has this influenced price action? Maybe Richard Dennis may have some views here.

When does the variation in conditions influence the ability to test? I suppose this might be the question.


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