Tue 8 Jan 2008
Stock market an excellent predictor of US recessions
Posted by Prieur du Plessis under Investment, Economy
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:
|
(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.
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January 8th, 2008 at 1:41 pm
How about a inflationary depression.
The Kondratieff wave is due about 2009/2010.
January 8th, 2008 at 3:19 pm
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.
January 8th, 2008 at 6:06 pm
The old joke says that the market has predicted eleven of the last seven recessions.
January 8th, 2008 at 9:10 pm
THE CONCENSUS IS IN ,
WE ARE IN RECESSION.
SO SELL CALLS.