Is Economic Growth Good for Investors?

Author: Jay R. Ritter

The cross-country correlation of GDP growth per capita and inflation-adjusted stock returns is negative when long periods are analysed. This is surprising, since economic growth, and especially unexpected growth, is presumably good for profits. The result holds for both developed countries and emerging markets. Economic growth comes partly from increased inputs of capital and labor, which don’t necessarily benefit the stockholders of existing companies. Economic growth also comes from technological change, which does not necessarily lead to higher profits if competition between firms results in the benefits being passed to consumers and workers. Realised growth has both an expected and unexpected component. Apparently investors overpay for expected growth, and this overpayment more than offsets the benefits of unexpected growth.

Ritter, J.R. 2012 'Is Economic Growth Good for Investors?'

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