Stock market an excellent predictor of US recessions

 EmailPrint This Post Print This Post

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

8-jan-thumbnl.jpg

Two major conclusions follow from Bangalore’s research:

(1)

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.

(2)

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.

Did you enjoy this posting? If so, click here to subscribe to updates to Investment Postcards from Cape Town by e-mail.

More on this topic (What's this?)
S&P500 Getting Ready to Break
Nearly 70% Of S&P 500 Stocks In Correction Or Bear Market Territory
S&P Approaches Critical Tipping Point
Read more on U.S. Economic Cycles, S&P 500 (SPX) at Wikinvest
OverSeas Radio Network

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

    THE CONCENSUS IS IN ,
    WE ARE IN RECESSION.
    SO SELL CALLS.

Leave a Reply

  

  

  

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Top 100 Financial Blogs

Recent Posts

Charts & Indexes

Gold Price (US$)

Don Coxe’s Weekly Webcast

Podcast – Dow Jones


One minute - every hour - weekdays
(requires Windows Media Player)
newsflashr network
National Debt Clock

Calendar of Posts

January 2008
MTWTFSS
« Dec Feb »
 123456
78910111213
14151617181920
21222324252627
28293031 

Feed the Bull