The condition of the U.S. economy underlies the level and direction of the securities markets (both stocks and bonds). Understanding the health of the economy, therefore, is an important element to managing investment portfolios--but it's important to be aware that emotions (i.e. fear and greed) often drive markets to extremes that cannot be explained by the economy alone.
CHART 1: Economy and Stocks
The relationship of the level of U.S. gross domestic product (nominal GDP) to the market value of U.S. stocks, as represented here by a non-copyrighted measure of U.S. equities employed by the Federal Reserve, is both intuitive and real. However, as shown in CHART 1 above, especially over the past 15-20 years, stocks have shown much greater volatility than the broader economy.
CHART 2: Economy and Bonds
Data source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis.
research.stlouisfed.org/fred2/
CHART 1 data:
Gross Domestic Product, 1 Decimal (GDP), and
Market Value of Equities Outstanding - Net Worth (Market Value) - Balance Sheet of Nonfarm Nonfinancial Corporate Business (NCBEILQ027S)
CHART 2 data:
Gross Domestic Product: Chain-type Price Index (GDPCTPI), and
10-Year Treasury Constant Maturity Rate (GS10)
Date accessed: 2022 Sep 07
The relationship between the change (year over year shown above) in U.S. gross domestic product (nominal GDP) is correlated with the level and direction of interest rates--represented in CHART 2 above by the 10 year U.S. treasury yield. An accelerating economy can squeeze demand for capital and force interest rates higher, while a slowing economy can depress the demand for capital and push interest rates lower.