But the notion of another snapback isn’t universally accepted, at least not one that comes anytime soon. The Organisation for Economic Co-operation and Development warned in a recent study that the risk of slower global growth is a key challenge in the decades ahead. “Global growth prospects seem mediocre compared with the past,” according to the group’s recent paper, “Policy Challenges for the Next 50 Years.” Emerging markets are still expected to rise faster than developed nations, but the edge is projected to fade because of “a gradual exhaustion of the catch-up process and less favorable demographics in almost all countries.”
If growth is slowing for an extended period, what does that imply for returns on risky assets—stocks in particular? The answer varies depending on your time frame and economic assumptions. But this much is clear: There’s a generally close relationship between changes in the economy (GDP) and equity returns across the decades, as Figure 2 shows.
Equity returns may wander off on their own in the short run. But expecting stock performance to disconnect from the real economy for any length of time is expecting too much (Figure 3). If economic growth is slow, it will eventually catch up with investors.
Slow-Growth Debate
November 3, 2014
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