Stock market an excellent predictor of US recessions

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The hot financial topic of discussion at the moment is the likelihood of a US economic recession. Against the background of a deteriorating economic landscape, it is not surprising that more and more commentators have started declaring that a recession was either already underway or just around the corner.

A noteworthy contribution to this debate has just been offered by Asha Bangalore, economist of Northern Trust. Her analysis deals specifically with the movements of the S&P 500 Index just prior to and during a recession. The leading/lagging properties of the Index, and by how much it changes during a recession, are summarized in the table below.

S&P 500 Index – peaks and troughs


Two major conclusions follow from Bangalore’s research:


The S&P 500 Index is a leading indicator par excellence. Since the 1950s, the Index has always peaked before the peak of a business cycle, with the 1980 business cycle being the only exception. The Index has established a trough prior to the end of a recession without exception.


The median percentage decline of the Index from its peak to trough was 16.9%.

By the close of the market yesterday the S&P 500 Index was down by 9.5% from its peak in October 2007. Although the expectation of a recession has been gaining support, it does not represent a consensus view by a long shot. Using Bangalore’s analysis of the historical relationship between the stock market and economic cycle as a guide, a rough ride could be in store in the months ahead.

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4 comments to Stock market an excellent predictor of US recessions

  • ed erdely

    How about a inflationary depression.

    The Kondratieff wave is due about 2009/2010.

  • Dave Turnbull

    Although the S&P may predict a business cycle, is the relationship one to one? That is, do we also know that an S&P peak is always followed by a business cycle reversal? The table seems to match the S&P to the business cycle and it is not clear if there were other index peaks (and troughs).
    Surely we also need to know the definition of a “peak” is, that is what % decline is needed – the measurement of the overall decline is somewhat specious as when the index trough occurs the business cycle has presumably well fallen.

  • Frank Oslick

    The old joke says that the market has predicted eleven of the last seven recessions.

  • john gough


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