March 2009
Many market observers believe that stock-market movements have a tendency to anticipate movements in the broad economy. Historically their research shows that stocks tend to slide before there's real evidence of a recession, and they have rebounded before there were signs of an economic recovery. Consider, for instance, that the stock market has anticipated each U.S. recession since World War II. And in each case, stock prices began to climb before the recession ended. (source: Ned Davis research)
Getting specific =
For a clearer picture of how stock prices could relate to future economic developments, consider this Q-and-A:
How long is the lag time between a significant movement in stock prices and the corresponding change in economic activity?
Research indicates that the average lag time is between six and nine months.
How much do stocks have to move in order to be considered a predictive signal of future economic growth?
Collectively, the stock market has to move at least 8 percent.1
When measuring the predictive power of stocks, what index is usually used to represent the stock market?
The S&P 500 Index, which measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the U.S. stock market.
How reliable is the stock market as an indicator of the future health of the economy?
The correlation between stock prices and economic growth is relatively high, but the stock market has a less-than-flawless record as a predictor. Financial analysts have found that the stock market is prone to getting a bit ahead of itself when predicting changes in the economy's direction. Since World War II, for instance, the stock market has predicted at least five recessions that did not occur.2
1 This is a commonly quoted figure that was noted in a 1985 paper by Ahmad Kader, "The Stock Market as a Leading Indicator of Economic Activity," published by The Atlantic Journal of Economics.
2
Saeid Mahdavim and Ahmad Sohrabian. "The Link Between the Rate of Growth of Stock Prices and the Rate of Growth of GNP in the U.S." American Economist, 1991.
Important notes
Investing involves risk, including the possible loss of principal.
Views expressed and the information contained in this publication are current as of March 2009 and are subject to change at any time.
Keep in mind that history does not always forecast future events. In many ways, the current economic downturn appears different than previous economic setbacks, and any stock-market upswings should not be interpreted as definite indications of an economic recovery.
The Funds are distributed by Delaware Distributors, L.P., an affiliate of DMHI, and MGL.
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