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Still A Big Bounceback Required To Return To Trend Growth in Stocks And The Economy

July 9,  5:00 pm EST

As we are working through an important month for stocks and the economy, I want to revisit a chart I worked up early on in the financial crisis recovery (about seven years ago).

We’ve looked at this chart quite a bit, but it’s been about a year since we’ve discussed it here in my daily Pro Perspectives note.

In the chart below, the blue line represents what the S&P 500 would have looked like had it continued its long-run annualized growth rate of 8% from the 2007 (pre-crisis) peak.

This blue line gives us perspective on where we stand in this stock market recovery.

Now, the orange line is the actual path of stocks (S&P 500).  What’s the point?

Even though we’re up more than four-fold from the 2009 bottom, and people continue to talk about how long this bull market has run, we still have not recovered the lost growth of the past decade.

That is clearly displayed in the GAP between the orange line (the actual S&P 500) and the blue line (where stocks would be had we continued along the 8% annualized path).

What can we attribute this gap to?  Post-recession recoveries are typically driven by an aggressive bounce-back in growth.  We didn’t get it.  Instead, the post-recession growth environment of the past decade was dangerously shallow and slow.

With that in mind, there is a similar gap in economic growth relative to trend.  Historically, growth slowdowns are followed by big bounce-backs in growth, to return the the path of the economy to “trend growth.”  We haven’t had it.

 

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