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April 15, 2009

Watching the stock market for clues

Everyone wants to know when this recession will end, and many are looking to the stock market for answers. What is the stock market's track record for signaling an end to the economic downturn?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, first of all, stock markets do tend to lead the economy. That is, they will turn up while the economy is still in a recession, but they will turn up in advance of that recession ending. And if you look, for example, at the recessions in the '70s, '80s and '90s, the stock market turned up about half way through the recession. So, for example, if the recession lasted a year, like it did in 1970, then the stock market began rising about six months into that recession or - another way of putting it - six months before the recession ended. Now our last complete recession of 2001, we saw a different pattern. There, the stock market continued to slide three-quarters of the way through the recession. It didn't turn up until about 25 percent of the time before the recession ended. So there wasn't a lot of lead time there, the traditional lead time that we've seen in previous stock market upswings. So, of course, now the big question everyone wants to know is, well, what about now? Will this stock market turn up earlier or later? Right now, it looks like we're following the pattern of the 2001 recession. If, for example, you think this recession will end at the end of 2009, then we've already been halfway through it because it began at the end of 2007. So if the stock market begins to turn up this spring, early summer, that would be the pattern we saw in the 2001 recession."

Posted by Dave at April 15, 2009 08:00 AM