A Small Note On Percentage Gains In GDP vs Percentage Gains In The S&P 500 | Exploring Markets

A Small Note On Percentage Gains In GDP vs Percentage Gains In The S&P 500

We were sent the following note:
Here is how the S&P 500 has performed in comparison to GDP during 1995, 1996, and 1997. Both figures are in percentage terms. We assume this correlation to be true and important. It's also a reason why the rally today confuses so many. GDP growth has been 2.5% and 2.8% over the last two quarters. Meanwhile the S&P 500 is up 25% in 2013. Now look at this:
1997: S&P 500 +31% vs GDP +6%
1996: S&P 500 +20% vs GDP +6.2%
1995: S&P 500 +34% vs GDP +4.2%


While to the blind eye this may seem fairly obvious, that high percentage changes in the S&P 500 are related to high percentage changes in GDP, it is actually NOT the case. At least not in percentage change terms. Today, GDP is $15 trillion. Compare that to when it was only $6-$7 trillion in the examples above including 1997, 1996, and 1995. It is much harder to increase a GDP of $16 trillion 6% than it is to move $6 trillion 6%.