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Affluent Christian Investor | October 18, 2017

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John Mauldin’s Muddled Stock Return Model

John Mauldin has become a financial celebrity. His blast email empire has grown to roughly 1.5 million recipients. He has used the latter to launch fee-based (between $150 and $200 per year) subscription newsletters, conferences around the country, plus he writes books.

I can’t say that I am a fan, or a reliable reader, but I am on his list. I typically do not read his emails in their entirety, but I do generally scan them. I find him to be generally better informed than most internet financial mavens, but a little philosophically muddled; seeming to switch from something like a set of supply-side principles to something like Keynesian principles with no real explanation (for an example of this, please see his interview on this page with Steve Forbes. I found Mauldin’s alleged refutation of Milton Friedman’s view of monetary inflation in favor of a more Keynesian view utterly unconvincing and wrote a piece for the American Enterprise Institute blog about it.

Mauldin’s material is well promoted and widely read (or at least widely circulated), and from time to time people ask me what I think of his opinion of some matter or another. As a general rule, I would say that the people who forward a John Mauldin email are more sophisticated than the people who forward something they got from Glenn Beck or some rented email blast. This makes sense, as Mauldin’s emails tend to have more charts and graphs and more financial lingo, and just more financial content than those other sources.

What usually happens is that someone reads one of the newsletters and then forwards it to a financial advisor (who then forwards it to me) with some kind of comment like: “John Mauldin says that we will get deflation, not inflation, because the economy is growing slowly.” Or, “John Mauldin says that government spending is good for the economy, at least in the short run. Do you agree with that?”

Most recently it was something like this: “Here’s a Mauldin newsletter which says economic growth doesn’t have anything to do with stock performance. What do you think?”

I decided to look into that last one.

It calls into question whether economic growth has anything to do with stock returns. This doubt about growth/stock performance is based on some research by Jeremy Grantham to the effect that GDP and stock returns are pretty much unrelated. Grantham’s article is rather nuanced and has a lot to ponder as does the research on which it is based, but the main evidence for the argument in the newsletter is presented in this chart:

But there are some significant problems with this analysis. First, as one can see, it is a very, very small data set. That may have been necessary in order to make the comparison go all the way back to 1980. But if one looks at a much more robust set of data based on a much wider variety of countries, one gets both a model with much better fit, and with a very different message. It is necessary to shorten the time frame from 20 years down to 10 years in order to get a data set which includes a lot more countries. On balance this gets considerably more data points into the analysis. My colleagues at Lattice Strategies did just that and here is what they found:

The data directly above shows a clear positive correlation between equity returns and GDP over the last ten years, and in addition the ‘goodness of fit’ (that is, a measure of how powerfully the model explains the relationship between the two variables) is considerably better than that of the analysis found in Mauldin’s newsletter. In statistical terms the latter data set has an R2of .44, while the former has an R2 of .06. This means that the data which shows a negative correlation between stock performance and GDP, has less data in it, and its negative correlation is only roughly 24%, while the analysis which shows a positive correlation between stock returns and GDP has a correlation of 66%.

If that bit of math means nothing to you, don’t worry: just look at the two charts and you’ll see the effect visually. The points in the second chart cluster much more closely around the line than the points in the first chart. R2s are just a rigorous quantitative way to put a specific number on how well the data fits the line; that is, how well the real world fits the theory. To put things in perspective, an R2 of 0 would indicate no fit at all, that the model had no explanatory power. An R2 of 1 would mean that all of the points would fit perfectly along the line: in that particular experiment one could perfectly predict return using GDP.

Looking more closely at the question by using a larger set of countries shows the connection between stock performance and growth relationship more clearly than Mauldin’s more limited data set. It seems pretty clear that GDP would have been a useful helper in determining stock performance, though by no means would it have been a perfect (or even the best available) tool. Other factors matter too. (more on that later)

Over the same time period we can break the countries into quintiles (fifths) and rank them in terms of return.

The chart above, also from Lattice Strategies, shows a very clear relationship between the fastest GDP growth countries on the left and high stock market returns. Conversely, we see the very low GDP growth countries on the right with very low returns.

Obviously the stock story is not entirely about growth: human beings are very complex and their behavior cannot be reduced down to just one factor. This obviously true fact is just as true of human beings as economic and financial actors as it is of human beings in any other context. Does adding money to a relationship make things simpler? No. So, why in the world would economists and financial analysts think that people’s financial behavior could be reduced down to just one or two simple equations?

Lots of things are important when it comes to stock performance, and unfortunately a rather disturbingly high number of them are generally ignored by most investment analysts: religion (yes, religion), fertility, ethical corruption, moral corruption, property rights, soundness of currency, debt, tax progressivity, and size of government (which is another topic on which Mr. Mauldin has become a little muddled: more on this later). Of course, beginning valuation also has significant influence on a country’s stock market performance.  If a country is priced with expectations for very high future GDP growth, the occurrence of such expected growth may not translate into a superior stock market return, for example.

But just as the stock story is not entirely about growth, just so it is partly about growth; growth clearly is at least one of the factors.

However, in order to understand things more deeply still, we will need to dig into the data more deeply and see that the real growth story is not just in the way that growth is good for stocks, but in the way that growth is better for stocks than it is for bonds. Next time, we’ll take a deeper data dive and learn even more.


Article originally published on

Jerry Bowyer is a Forbes contributor, contributing editor of, and Senior Fellow in Business Economics at The Center for Cultural Leadership.

Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.

Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.

Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.

Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.

Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.

Jerry lives in Pennsylvania with his wife, Susan, and the youngest five of their seven children.


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