It’s widely and commonly believed good stock returns require strong GDP. And that’s true! Sort of. (And not in the long term—see Bunk 10 for why supply sets price in the long term, making all correctly calculated categories’ returns almost equal with widely varying paths en route.) But different types of stocks shine in weaker versus stronger economies.
Some stocks are defensive in nature and tend to do better relatively when GDP is weaker—sectors like Consumer Staples, Health Care, and Utilities—though not always and everywhere. When times are tough, folks don’t upgrade their TVs and go on cruises so much (or somewhat more prosperous folks who are struggling nonetheless might buy a new TV instead of going on a cruise), but they typically do keep buying toothpaste and electricity and aspirin. (If times are really tough, maybe they need more aspirin! See Bunk 39.) So those kinds of stocks typically do better than the market overall in downturns—though you can certainly find periods historically in a strong economy when they do fine too.

Stocks Move First—Up or Down

But there are two problems with this thinking: First, stocks lead the economy, not the other way around. If you wait for confirmation from the economy before making a move—you can pay big. (See Bunk 9.) For example, the US economy did fine overall in 1981, growing 2.54 percent1—though a recession started midyear. 2 Stocks knew it was coming—falling 4.9 percent for the year.3 GDP was positive, ...

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