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U.S. GDP Gets Revised Higher: Time to Buy Stocks?

There IS a connection between stocks and economy -- but it’s NOT what almost everyone thinks

by Vadim Pokhlebkin
Updated: August 03, 2015

[Editor's note: The text version of the video is below.]

The U.S. GDP growth has just been revised upward. That, many experts say, sets the stage for a stock market rally -- because the economy leads and the stock market follows. Right? At least, that's what almost everyone believes. But even a brief glance at recent history proves otherwise.

Last week, the Commerce Department revised upward this year's U.S. GDP growth. That, says CNN Money, sets the stage for a stock market rally:

"The second half is going to be better for the economy and the market than the first half," says [one market expert]. The economy grew 2.3% between April and June compared to a year ago. The Commerce Department also revised up growth between January and March, which was previously thought to be in the red. Those two positive indicators clear the runway for America to pick up more speed."

"Pick up more speed" -- because, the economy leads, and the stock market follows. At least, that's what almost everyone believes.

But even a brief glance at recent history proves otherwise. Consider: U.S. stocks began their biggest decline since the Great Depression in October 2007. Was the economy weak leading up to the top? No, quite the opposite:

  • In the quarter immediately preceding the October 2007 stock market peak, the U.S. GDP expanded at 2.7% -- even stronger than the latest GDP number for this year
  • Unemployment rate in 2007 was at 4.6%, better than it is today
  • Consumer spending drives roughly 70% of the U.S. economy -- and consumer confidence was very strong, too (top red circle; chart: Bloomberg)

Despite all that, between October 2007 and March 2009 the Dow fell more than 50%:

If you think that was odd, then fast forward to early 2009, when the economy was in shambles:

  • Consumer confidence fell to an all-time low (the second red circle on the blue chart)
  • U.S. GDP growth fell to a negative -5.4%
  • Unemployment rate more than doubled to almost 10%

Ask almost anyone, and they'll tell you that such terrible fundamentals should have been a final blow for the stock market. And yet the Dow bottomed with confidence in March 2009.

In both cases, the economy did not lead the stock market higher or lower. It was the stock market that lead the economy: lower in 2007 and higher in 2009.

In other words, the conventional wisdom which says that where the economy goes, so does the stock market is precisely backwards.

That brings to mind this quote from our new, August Elliott Wave Financial Forecast:

"The majority of stocks are far weaker than the 'headliner' stock indexes indicate. As Bloomberg reported, with the S&P 500 still near its May high, 57% of the stocks in the S&P are down at least 10% from a recent peak, and 67% of the stocks in the broader Russell 3000 index are down 10% from their recent highs. ...

"The NASDAQ was the only major U.S. average to hit a new high in July, creating a topping sequence similar to January-March 2000 and October 2007, when the NASDAQ indexes were the last to peak on a closing basis."

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