The Little Book of Market Myths: How to Profit by Avoiding the Investing Mistakes Everyone Else Makes

Chapter Six

The GDP–Stock Mismatch Crash

“Stocks must crash because they outpace GDP!”

Every now and then, some talking head will bluster that stock returns are unsustainable and must crash because they far outpace the US economy’s growth rate.

It’s true! Long term, US GDP real growth has averaged about 3%. But US stocks have appreciated at an annualized 10% average.1 That’s a major gap betwixt. And if you believe (as many do), over time, the two rates should roughly match, then you may fear the margin between represents some sort of phantom returns. If our country’s output grows about 3% a year on average, then where the heck is that excess return coming from?

Viewed that (incorrect) way, that gap is worrisome. Stocks would have to crash a long way to close that long-term annualized gap. Yikes!

Except stock returns and the GDP growth rate aren’t linked. They don’t match because they shouldn’t match. Stocks can, should and probably will continue annualizing a materially higher rate of return than GDP growth. And that makes sense, if you think about what GDP is and what stocks are.

GDP Measures Output, Not Economic Health

GDP is an attempt to measure national output—a wonky and imperfect one at that. It’s built on surveys and assumptions and is often restated—even years later. It doesn’t measure national assets or national wealth and doesn’t try to. Rather, it’s a standard economic flow.

See it this way: As of year-end 2011, America’s GDP was about $15.3 trillion (in today’s dollars). ...