Ben Felix - Why Bad Economic News Doesn't Always Hurt Stocks

Short Summary

Main recommendation: Investors should not use economic news such as unemployment or GDP data to guide investment decisions, because stock prices already reflect expectations about the future and only surprises relative to those expectations move markets. Economic data is backward-looking and often released long after events occur, and historically, faster economic growth has not produced higher stock returns.

Key Points

• Markets are forward-looking pricing mechanisms: in an efficient market, anticipated news is already priced in, so only news that is better or worse than expected moves stock prices, regardless of whether it is good or bad in absolute terms.
• During the 2007–2009 recession, the US stock market began declining in October 2007, before the recession officially began, and rose 56% from March through December 2009 while economic data kept getting worse.
• Fama and French (2018) found no evidence that yield curve inversions help investors avoid poor stock returns, even though yield curves can forecast economic activity.
• Jay Ritter (2012) found negative correlations between stock returns and GDP growth: -0.39 across 19 mostly developed countries (1900–2011) and -0.41 across 15 emerging markets (1988–2011).
• Slippage, described by Arnott and Bernstein (2003), occurs when new share issuance dilutes per-share earnings growth, so economic growth does not translate fully into shareholder returns.

Details Worth Noting

• Concrete instructions: The video gives no step-by-step investing procedure or actions to take. Its only actionable guidance is to not base investment decisions on economic data, and if economic news makes it hard to stick with a well-thought-out long-term investment plan, it may be best to ignore that data altogether.
• The NBER dated the 2007–2009 recession's start (December 2007) and end (June 2009) only later, in December 2008 and September 2010 respectively, showing how lagged official economic dating is.
• Unemployment in the US exceeded 9% from May 2009 and peaked at 10% in October 2009, yet stocks bottomed in February 2009 and then rallied strongly.
• Arnott and Bernstein found that war-torn countries' stock market growth trailed their economic growth by nearly twice as much as non-war-torn countries, due to high equity recapitalization.
• Chinese stock returns were cited as possibly weak despite huge economic growth, partly because market capitalization growth came largely from new listings rather than price appreciation of existing companies.

Bottom Line

Economic data reflects the past and is largely already priced in by markets, so it is a poor basis for timing investment decisions; long-term plans should not be driven by short-term economic news.