Tuesday, November 4, 2008

The Stock Market and the Economy

Let's see; the auto makers are tanking, unemployment is up, durable goods orders are down, we have one quarter of negative growth (of the two needed to call a recession).....but the market seems to have stabilized. What's going on here?

Well, it looks to me like once again, the predictive power of markets in action. The market saw all this coming and priced it in. A 1/3 drop in the Dow was Wall Street's way of telling the rest of us trouble was coming (and of course, it was Wall Street's way to tell us THEY had been caught with their hands in the cookie jar).

But I think if you watch closely, you'll begin to see the market begin to predict the rise out of this. Remember....you need two consecutive quarters of negative growth to call a recession; therefore, you're six months into one before the economists will call it one. Works about the same in reverse...the recession will have been over for months before the economists will call it. The market will reach that decision much earlier.

1 comment:

Goldwater's Ghost said...

Perhaps, unless this period of market stabilization is only the eye of the hurricane.

One of the economics blogs that I frequent (yes, yes, must get a life) speaks to three separate crises: financial, economic and funding. We're only emerging from the tail end of one of them (financial), with two more waiting in the wings. And the funding crisis may only exacerbate the economic mess. So while I think the markets have reacted to one, as you point out, we're only in the third inning of this ball game.

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