By Grant de Graf
In an interview with the WSJ, hedge fund manager, Oscar Schaffer, describes the unusual correlation between stock performance and GDP. (See "Stock Performance Enigma") Greece and China (among many other countries) are examples where the performance of stocks are inversely correlated to GDP. Although GDP in Greece disappointed, stocks experienced all time highs. Conversely, China which displayed an expanding GDP, incurred a retraction in stock trends.
Schaeffer defines stock performance being correlated to other factor like earnings and the inflow of funds. He anticipates that when bond yields start to increase, there will a long term outflow of capital from (long term) bonds into stocks, as investors are likely to be concerned about capital losses in the bond market.
However, the equation is not so simple and linear. The performance of stocks will ultimately depend on many other economic factors and should the risks in stock investment increase and the impact of a European fallout weigh against the U.S., investors may well direct capital towards short-term income yielding bonds and reduce their exposure in stocks.