The Influence of Productivity Growth on Equity
Market Performance

Abstract

Ultimately, stock market performance has to be driven by the real side of the economy, and more specifically, economic growth. However, it is well known that there is a difference between growth resulting from improvements in productivity and growth resulting from an increase in inputs, with the former translating into higher living standards. The authors utilize productivity growth data from the NBER-CES and BLS research programs and link productivity growth with stock market performance. They assess whether productivity gains are passed through to shareholders or are bid away through competition, and therefore, whether there is an investment strategy that can be built using these productivity data. Their results show that investing in high productivity growth industries over the long term generates returns in excess of the market, even after adjusting for risk. As such, they show that productivity growth is an important dimension of investment returns and should influence investment strategies. However, if productivity growth is to be used to create profitable investment opportunities, the challenge is to accurately forecast productivity growth on a timely basis.