This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Finding the Missing Link Between Stocks and GDP

What do our eyes tell us? The big dip between the mid-1960s and late-1970s coincides with rising inflation, while the succeeding move higher corresponded with disinflation. As we can see below, this is a pretty good start, but it has gaping holes of its own. Sharp reductions in the Consumer Price Index in 1975-1976 and the general disinflation of the 1980s didn't pull stocks higher as we might expect. Moreover, the equity bubble of the 1990s and its subsequent bursting all took place within a narrow range of measured inflation. Let's keep the annualized CPI changes off to one side as one explanatory variable.

Usual Suspect Number One: Inflation
Source: Bloomberg

Qs You Can Use

Once inflation is parsed out of the model, other market-derived variables such as long- and short-term interest rates, the shape of the yield curve and the exchange value of the dollar have to be excluded as well. All of these measures are too related to each other to be included simultaneously. Even worse, we don't have long histories of free-market prices for energy or currency-exchange rates.

Stock prices measure, or should measure, the expected return on capital. When prices are high and expected returns are low, we should expect new investment to fall and the return on existing-capital stock to rise. The late Nobel laureate James Tobin created a measure now referred to as Tobin's Q, which is the ratio of the market value of capital to its replacement cost. A Q-statistic greater than 1.0 indicates stock prices are overvalued relative to the replacement cost of their underlying assets, and that leads to a surge in new stock issuance. This wave of new investment capital drives down returns and leads to both overcapacity and lower stock prices. If any of this sounds familiar, it should.

2 of 4

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 18,053.71 +23.50 0.13%
S&P 500 2,088.77 +6.89 0.33%
NASDAQ 4,806.8590 +33.3870 0.70%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs