O’Shaughnessy: The Market Is Not The Economy

While fears about the U.S. and global economies are leading many investors to ditch stocks, James O’Shaughnessy’s firm says those fears are reason to embrace stocks, not run from them.

“Uncertainty is always uncomfortable,” writes Patrick O’Shaughnessy, James’ son, in new commentary on the firm’s web site. “What we do know, however, is that the future of the S&P 500 is not likely to be tied to the current state of the economy. In fact, if any relationship exists between the market and the economy through history, it is a negative one where investors should be buyers of equities when GDP growth is negative, unemployment is peaking, and consumer sentiment is low.”

O’Shaughnessy offers a few intriguing data points, including:

    • After periods when GDP growth is negative, the S&P 500 has averaged 21.36% returns over the next year; 12.24% annualized returns over the next three years; and 12.10% annualized returns over the next five years;

  • Since 1929, the level of correlation between unemployment and three-year stock returns has been small, making the data not helpful in predicting future returns;
  • Consumer confidence is at its lowest point in at least ten years, according to an Investor’s Business Daily survey, and times of low confidence are usually followed by strong returns;
  • The five-year “normalized” P/E ratio used by the Leuthold Group is below the 1957-present median for the S&P

O’Shaughnessy recommends a non-emotional approach to the recent downturn, and says investors with at least a three-year time horizon should start using any cash on hand to buy stocks with attractive values and yields. “We cannot ignore the possibility that we may see another bear market; after all this has been one of the most impressive bull markets in history,” he says. “But any decision to sell should not be based on jobs reports, drops in GDP, or raw fear.”