Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is the Stock Market a Leading Economic Indicator?

Stock-Markets / Economic Theory Oct 12, 2009 - 09:23 PM GMT

By: Mike_Shedlock

Stock-Markets

Best Financial Markets Analysis ArticleInquiring minds are pondering the question "Is the Stock Market a Leading Indicator?"

Please consider the following two charts.


S&P Monthly Chart 1980-1992


Vertical bars on the chart show when recessions began. There were three recession isn this period, starting January 1980, July 1981, and July 1990 according to NBER Business Cycle Expansion and Contraction Data. The NBER is the official determinant of recessions.

Looking at a chart of the S&P it is difficult to suggest the Stock Market is a leading indicator, coincident perhaps but certainly not leading.

Moreover, the biggest decline during the period was a 35.9% drop in 1987, a period in which there was no recession. Furthermore, I circled four areas with very similar patterns in the 1980-1992 timeframe that were recessions following essentially sideways corrections in the S&P 500. Two of them were recessions, two were not.

For the 1981 recession and the 1990 recession, one could only tell there was a recession coming in hindsight. Finally the January 1980 recession vs. the S&P 500 looks like noise. The stock market actually rose at the start of the recession.

S&P Monthly Chart 1998-2009


There were two recessions in the 1998 - 2009 timeframe. The clearest case that the stock market is leading came in the recession that began in March 2001. However, the recession ended in November 2001 yet the stock market made a substantial new low mid-2002 with a double bottom test in Spring of 2003.

The stock market declined 34% after the recession was over. Is that a leading indicator? Of what?

For the recession that began in December 2007, the S&P 500 was down only a few percent from its all time high. Is that a leading indicator?

Clearly the answer is no. The S&P 500 was a coincident indicator for the entire recession. The NBER has not yet declared the end of the recession but it will do so and it will be backdated, most likely to Spring of 2009.

If so, the market will have proven to have been a coincident indicator, known only in hindsight.

Conclusion

The stock market is at best a coincident indicator, known only well after the fact. Furthermore, even as a coincident indicator, the stock market gives many false signals, making it totally useless for all practical purposes.

The theory that the stock market is a reliable leading indicator is a myth easily shattered by simple observation of the facts.

For further discussion of leading indicators, please see Can We Really Trust The Leading Economic Indicators?

By Mike "Mish" Shedlock

http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2009 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Jeff McGeorge
13 Oct 09, 00:25
Stock Market a Leading Economic Indicator?

LOL, Mike Shedlock, in one breath, tells us ad-nauseum about

the manipulation shenanigans of markets by the USFED, and then in another breath, tells us markets aren't a leading indicator....Mike, take away the Central banks printing presses and I GUARANTEE the stock market will agaion become a good leading indicator...!!

Kind Regards,

Jeff McGeorge


Dave
14 Oct 09, 02:15
Stock markets are a leading indicator...but about what?

Hello everyone

To Jeff: There is no point in taking away the central banks' printing presses. They are there and will continue printing. If what you mean is that stock markets would go down without the printing of money, then I would agree. But what's the point? We are increasingly in a state controlled economy. It is therefore time to understand that free markets have gone. Princing is also highly a function of state and central banks massive intervention. This fact is there to stay.

To Mike: While stocks may not be a leading indicator of a possible recovery in the economy, I do believe they are a leading indicator of how terrible are the problems affecting our economy. Indeed, stocks markets are dictating the states and central banks the speed of cash injections. Meaning that whenever stock markets are going down, this scares our governments and central banks, which then add even more cash to the system, ending unp in asset classes.

Stock markets is the leading indicator of the current problems and those to come. It is a contrarian indicator of the soundness of the economy. But it is a leading indicator of the speed at which the economy becomes more and more state controlled. In the end, to save a few rich people, most will become poor (the so-called taxpayers).

The stock markets is also a leading indicator of the falling purchains g power of currencies. Stocks have become a partial hedhe against falling currencies. At with stocks there are cashflows, with paper noney, there is only paper.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in