Tuesday, February 23, 2016

Can a Bear Market Indicate the the Potential for a Recession?

This question reminds of the quote from the famous 20th century MIT economist, Paul Samuelson, "the stock market has predicted 9 of the last 5 recessions".  

If we are at the beginning stages of a recession then soon the unemployment rate will begin to increase and economic growth will begin to slow.  Given the recent decline in the unemployment rate (see below) and continued job growth that seems unlikely.  In addition although economic growth is relatively weak by historical standards it continues to chug along.

A recent analysis by Steve Liesman at CNBC shows that since the end of WWII the US stock market has suffered 13 bear markets.  A recession followed within 12 months of the bear market on 7 occasions for a hit rate of 53% (about like flipping a coin).

So is it axiomatic that that the US is headed into a recession due to the recent decline in the stock markets.  No.  There is about 50-50 chance the US is headed into a recession.  Given the decline in the unemployment rate and a weak but flat economic growth rate the chances for a recession are relatively low.  Besides as stated in my previous post the recent decline in the markets is more than likely caused by the selling of SWFs and has little to do with the US economy.

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