When it comes to big stock market gains, we're right in the 'sweet spot'

Bullseye

(Wikimedia Commons)

We might be in the sweet spot for stocks.

In a note to clients on Thursday, Gluskin Sheff's David Rosenberg looked at how stocks fared under various growth and inflation scenarios and found that right now might be about as good as it gets for prospective stock gains.

Here's Rosenberg:

In periods when real GDP growth is running between 2% and 3% at the same time that core inflation is between 1% and 2%, the average annual advance in the S&P 500 is 14.4%.

Note that if growth were to move up a notice to a 3% to 4% range while maintaining core inflation between 1% and 2%, that average annual stock price gain rises to 22.6%.

Fore the bears, the only periods when the stock market enters negative price territory — and this is true under any inflation scenario — is when real GDP growth is 1% YoY or lower (thankfully we are just under 3% right now).

At no time, under any inflation segment, did the stock market fail to rise with real growth minimally at 2%. That is reassuring.

Since the financial crisis, real GDP growth has been running at around 2.2% annually. Inflation, meanwhile, has been running around 1.7% year-over-year.

In other words, we're right where you want to be for big stock returns. In 2012, the S&P 500 gained 13%; in 2013, it gained 29%; in 2014, it gained 11%.

So while so much of the rally in US stocks, especially since 2012, has been attributed to actions from central banks, the reality is that even with this support, the economy was giving stock investors ideal conditions for big returns.

And this, Rosenberg says, is why we're seeing stocks power higher still: Year-to-date, the S&P 500 is up 3.4%.

And so looking forward, here's the table from Rosenberg to keep in mind, laying out what growth/inflation combinations are best — and worst — for big stock returns.

stock returns

(Gluskin Sheff)

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