So, does the market predict economic downturns, or cause it?

[cdcaveman]

Paul Samuelson was a keysian hack... But yes the market is forward looking. Leading indicator of market sentiment... Look at how many people on here have completely switched to bearish because of a correction... Many of you guys have a backward looking view for sure haha..

 

[jinxu]

"The markets have successfully predicted 9 of the last 5 recessions."
Paul Samuelson, MIT professor, 1970 Nobel Prize laureate in economics.

That is actually still good. If you can't understand why that's on you:

Ultimately, CNBC research raises questions about Samuelson's quip in the first place. In any given year, the economy has a random chance of being in recession about 20 percent of the time. But if it's 9 out of 5 or 13 out of 7, it's right more than half the time. A gauge that offers a success ratio greater than 50 percent is better than a so-called random walk.

 

[qxr1011]

the market PREDICTED the economy tanking, or instead whether it caused it?

i think neither

market just coincides with the economy

 

[tommcginnis]

That is actually still good. If you can't understand why that's on you:

I appreciate where you're coming from, but the interpretation you're citing is incorrect itself. Taking a Weiner process from a Brownian motion (random walk) underlayment, implies a 50|50 split between some movement up, and some movement down. It remains a pretty fair representation of a market price path.

A recession, however, is a wholly different kettle of fish -- to which the CNBC cite wrongly seeks to draw equivalencies. You are talking about output, not prices; you are talking about a movement biased by construction downward, not one where, on any Next Draw, the Independent & Identically-Distributed assumptions would observe "Sorry, Sheriff! Can't tell up nor down!"

Not to get nerdy, but Paul pwned CNBC a'priori.

 

[Saltynuts]

I can tell from several threads that you're looking for some kind of holy grail "leading indicator" that simply doesn't exist. The economy and the market are inextricably linked, it's hopelessly naive to ask if one predicted or caused the other as there are dozens and dozens of factors that influence the answer to that question. Again, I highly recommend a Finance 101 MOOC, it will answer many of your questions and given your interests expressed here I think you'll find it very interesting and enjoyable. Getting a finance education in dribs and drabs from a bunch of jackasses on the internet who may or may not know wtf they're talking about is madness when there are so many high quality free options available.

No, no, I long ago realized there is no holy grail leading indicator. What I was really wondering is whether one should even attempt to study/measure economy leading indicators - if essentially they are triggered by the market cratering, and nothing can predict that, then studying the economy leading indicators would be a complete waste of time. I suspect this is not the case (and most peeps in here, including yourself, seem to think this). Thanks!

 

[truetype]

Paul Samuelson was a keysian [sic] hack

Pray tell, which of his books have you read, to inform your opinion?

 

[Pekelo]

Is there any evidence as to, when the market goes into bear mode, and a few months later the economy tanks, the market PREDICTED the economy tanking, or instead whether it caused it?

https://imgur.com/id%3DRgJlv%3Btype%3Dalbum

 

[SunTrader]

According to NBER National Bureau of Economic Research the last recession "officially" began in Dec'07.

SPX on monthly chart topped in Oct, closed down mid bar in Nov, a Doji in Dec then mostly lower lows thereafter till March '09 bottom. There is your answer - at least as far as last time is concerned. No advance indication.