Which Improves First - The Stock Market or the Economy?

by WallStreetOasis.com (Senior Gorilla, 903 Banana Points Points) on 9/1/08 at 11:28pm
Which Improves First - The Stock Market or the Economy?

David I. Templeton submits: Historical data suggests the equity markets improve before the economy begins to show some economic strength. As a result, can investors afford to sit on the sidelines before they see signs of an expanding economy? In his book, Stocks for the Long Run, Jeremy Siegel, a professor at The Wharton School, notes that:

"...of the 42 recessions from 1802 to the present (2002), 39 of them, or 93 percent, have been preceded (or accompanied) by declines of 8 percent or more in the total stock returns index. Historically, a bottom in the market has led a trough in the business cycle by about five months.

Investors will have little luck predicting market upturns and downturns because turning points are usually identified months [after] they’ve occurred, not beforehand. In the meantime, they’ll miss out on significant gains. From the bottom of the market to the end of the recession, the stock market has risen an average of about 24 percent."Complete Story »

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aloki's picture

I think that it's fairly

by aloki (not verified) (Chimp, 0 Banana Points Points) on 9/2/08 at 2:19am

I think that it's fairly intuitive that the market improves before the economy does. I read somewhere that when we officially entered recessions in the past, the market has actually gone up. It's all about future expectations.

yesman's picture

textbook Series 7 question -

by yesman (Senior Baboon, 213 Banana Points Points) on 9/2/08 at 9:13am

textbook Series 7 question - value of stocks is the discounted value of future earnings, ie - market has to take into account future expectations. Stock market is therefore a leading indicator, so it will improve first.

trade4size's picture

What are you talking about

by trade4size (Senior Gorilla, 826 Banana Points Points) on 9/2/08 at 2:37pm

What are you talking about yesman. You wont find that on the series 7...

aachimp's picture

rhetorical question: so why

by aachimp (Gorilla, 611 Banana Points Points) on 9/2/08 at 3:34pm

rhetorical question: so why is it that the market isn't taking into account the eventual recovery of the economy?

DiPietro's picture

this reminds me of some

by DiPietro (Senior Baboon, 200 Banana Points Points) on 9/2/08 at 5:14pm

this reminds me of some anectdote about economists sneering that the market has predicted 10 out of 5 recessions

the reparte being: the economists haven't predicted any

yesman's picture

trader4size - when I took

by yesman (Senior Baboon, 213 Banana Points Points) on 9/3/08 at 9:26am

trader4size - when I took the series 7, indicators were a minor topic covered (2-3 questions).

aachimp - market isn't taking into account eventual recovery of the economy because it's not forseeable. I'd watch for home supply surplus to start stabilizing or going down. of course the economy will eventually recover, but this is a very fundamentally-based downturn: people are (hopefully) rethinking how they spend and finance their lives