Unemployment remains high, economic growth is slowing, taxes may soon rise, and consumer confidence is near historic lows. But while investors are fleeing stocks in favor of bonds amid the tough economic times, history shows they shouldn’t, according to research from James O’Shaughnessy’s firm.
In its latest market commentary (“The Economy and the Stock Market”), written by Patrick O’Shaughnessy, James’ son, O’Shaughnessy’s firm looks at how stocks have fared throughout history when various economic indicators have been at or around current levels. Their conclusion: “GDP growth, unemployment, taxes, and consumer sentiment all seem like they should matter for your portfolio,” writes the younger O’Shaughnessy, “but 110 years of history says that they do not. The relationships between these sensitive economic variables and future equity returns are very weak, and, if anything, contrarian.”
Among the group’s specific findings:
- Historically there is a “lack of any predictive of actionable relationship between economic growth and stock market returns. In fact, if there is any helpful relationship it is a contrarian one, where the best time to invest in the stock market is when the economy is contracting.”
- “High [current] levels of unemployment … are not a sign of weak stock returns in the future.”
- “The tax rate in any given year has not affected stock returns in that year.”
- Of the variables examined, consumer confidence has the strongest apparent relationship with future stock returns — and it’s a contrarian relationship. That suggests current low consumer sentiment levels are a bullish sign.
O’Shaughnessy encourages investors to focus on variables that have been predictive of future stock returns, such as P/E ratios, which he writes “remain in attractive territory. … The normalized P/E ratio for the S&P 500 remains in the cheapest one-third of observations dating back to 1956”.