In a Barron’s interview, economist David Rosenberg states that the correlation between GDP and the S&P 500 has dropped to 7% from a historical range of 30% to 70%, and that consequently the “stock market is telling you nothing about the economy anymore.”
As for why the correlation has dropped so significantly:
“We have had $4 trillion of quantitative easing matched perfectly by $4 trillion of corporate share buybacks, to the point where the share count of the S&P 500 is down to its lowest point in two decades. You would normally believe that a powerful bull market in equities would have been reliant on a strong economic backdrop. But that’s far from the case. We have never before seen such a stock-market performance in the face of what has been in the last 11 years the weakest economic expansion of all time. We haven’t even had one year of 3% or better real GDP growth in the U.S. since 2005.”
Rosenberg states that the companies that have raised large sums of debt used the proceeds to buy back shares instead of making capital expenditures to invest in future growth. These purchases have little to do with the economy and create an “illusion of prosperity.”
Click on the link below for an interesting read.