Chris, with all due respect, it is actually you who is ignoring the data I have presented here several times. I hope you will read this carefully, as well as Roubini’s post, so there won’t be any further confusion about the relationship of the stock market and recessions.
You corrected me yourself, and explained why the stock market is forward looking. Therefore, by definition of forward looking, the stock market falls several months before a recession, and rallies several months before the recession is over. Roubini’s charts of the last 6 recessions depicts that this is exactly what happened. (This is explained by Ellis in his book Ahead of the Curve as well.)
Roubini’s charts and research show that the stock market fell peak to trough by an average of 28%, if you correctly look at the peak before the recession started, and the trough in the middle or near-end of the recession. Some economists and investors make the mistake of looking at the stock market during the period that defines the recession, because they don’t understand the recession is a lagging indicator, and the stock market is a leading indicator of the economy.
So in each of these last 6 recessions, going back to 1973, the stock market peak occured several months before the recession began, and the trough occurred 4 – 6 months before the recession ended.
Note that in none of the past 6 recession, did we ever rally in the stock market going INTO a recession. The times you mention that the stock market rallied in a recession – yes, they always do! As wages increase, and consumer spending picks up, the stock market anticipates increased corporate earnings and prices rise; a few months later, GDP increases again, and voila: the recession is officially over. So of course the stock market rallies toward the end of a recession, but it does not rally going INTO a recession. I hope I have explained this well enough this time around.
So the only question is: will we have a recession? There is no doubt at all that the stock market must fall going into a recession. If you want me to say I could be wrong, I’ll have to say it this way: “I am 100% certain we are heading into a recession, but it is possible that I am wrong about stocks falling in a recession; investors could bid up stock prices in the face of declining and dismal corporate earnings/outlook and bleak prospects for the future. It has never happened, but markets could behave irrationally. I could be wrong about a recession, but I’m not putting my money on that; my money is on a recession.”
As Ellis explains in his book, many investors get confused about recessions. While in a recession, they stay out of the stock market. Instead, they need to be looking for signs that wages and consumer spending are picking up. Once the recession gets under way, I will be looking for signs that it is ending, so I can get back into the stock market.
Chris, I’m sorry I misquoted you. I remembered the number incorrectly. I apologize for this error. As far as your statement “You need to tighten some of these things up for your consulting because they are known by people with experience and you do not want your credibility undermined”, it is actually you who misunderstands the relationship between the stock market and recessions. So take your own advice on that one.
