The stock market is way down again today. It's been terrible over the last few weeks. So, like clockwork, the media is pulling out articles questioning whether or not this drop in stocks means a recession is coming.
The answer is that the stock market is a very poor indicator of impending recession. One very famous quote on the subject from a well known economist is that the stock market predicted nine of the last five recessions. The point is that sometimes a stock decline indicates a recession is coming and some times a decline in stock prices indicates nothing of the sort.
So why is the market down now? Is it because interest rates are rising or because the yield curve is inverted? Is it because corporate profits growth is slowing? Is it because there's fear of a government shutdown? All of these have been used as reasons by the media lately for the decline. Some of these reasons, like the fear of a government shutdown, are best described as laughable. Others, like the slowdown in the growth of corporate profits are pointing to something that has been inevitable all year. Profits in 2018 grew rapidly because of the major tax cuts for corporations. There will be no such cut in 2019, so the growth of profits will necessarily slow. Rising interest rates have been in the cards for the last few years as well. The markets went up and now they are going down, and during all that time rising interest rates were the expectation and the reality.
The truth is that we don't know for certain why the markets are declining. It reminds me of the people who appear on TV or on the radio a few minutes after the close of the markets for the day to "explain" why the market moved in a particular direction that day. These "geniuses" know for certain at 4:15 why the market performed as it did on any given day. During the day, however, they couldn't tell where the market was going.
In short, it doesn't seem likely that we are heading into a recession. The actual figures that might indicate this just aren't in place. But, as they say on those lottery comercials, "hey, you never know."
The answer is that the stock market is a very poor indicator of impending recession. One very famous quote on the subject from a well known economist is that the stock market predicted nine of the last five recessions. The point is that sometimes a stock decline indicates a recession is coming and some times a decline in stock prices indicates nothing of the sort.
So why is the market down now? Is it because interest rates are rising or because the yield curve is inverted? Is it because corporate profits growth is slowing? Is it because there's fear of a government shutdown? All of these have been used as reasons by the media lately for the decline. Some of these reasons, like the fear of a government shutdown, are best described as laughable. Others, like the slowdown in the growth of corporate profits are pointing to something that has been inevitable all year. Profits in 2018 grew rapidly because of the major tax cuts for corporations. There will be no such cut in 2019, so the growth of profits will necessarily slow. Rising interest rates have been in the cards for the last few years as well. The markets went up and now they are going down, and during all that time rising interest rates were the expectation and the reality.
The truth is that we don't know for certain why the markets are declining. It reminds me of the people who appear on TV or on the radio a few minutes after the close of the markets for the day to "explain" why the market moved in a particular direction that day. These "geniuses" know for certain at 4:15 why the market performed as it did on any given day. During the day, however, they couldn't tell where the market was going.
In short, it doesn't seem likely that we are heading into a recession. The actual figures that might indicate this just aren't in place. But, as they say on those lottery comercials, "hey, you never know."
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