US stockmarket crashes and GDP

After the crash

Aug 16th 2011, 14:59 by The Economist online

Does a big one-day drop in the stockmarket presage recession?

AMID last week's stockmarket turmoil the Dow declined 5.5% on August 8th. Though a long way from being the largest one-day fall in equity markets in recent years, it was big enough to rattle investors who feared that it signalled a broad appreciation by market participants that the American economy was slowing. Talk of double-dip recessions had been muted in the months before the crash. In the days following it, investors spoke of little else. So how predictive are big one-day falls of subsequent recession? Not very, as the chart below shows. In almost all big market falls since 1951 the crash has come in the midst of an economic recovery. In most cases, economic growth continued for several quarters after the crash, with the notable exception of the market collapse in October 2008, which was followed by recession. Investors have good cause to worry about the valuation of stocks in America. By measures that compare price to average earnings (Robert Schiller’s cyclically adjusted ratio) they look far from cheap. Investors also have reason to worry about the American economy, mainly because it faces considerable fiscal tightening. The one thing investors need not worry about is whether a fall in the former tells us much about the likely performance of the latter.


US stockmarket crashes and GDP

After the crash  (part 2)

Aug 17th 2011, 12:54 by The Economist online

Charts, maps and infographics

Daily chart

US stockmarket crashes and GDPAfter the crash (part 2) Aug 17th 2011, 12:54 by The Economist online



What happened to America's economic growth after big ten-day falls in the Dow?

DRAMATIC one-day declines in stockmarkets don’t often presage broader economic pain (see yesterday's Daily chart). But what about sustained drops? The gut-wrenching 5.5% fall in the Dow on August 8th might not be cause for concern, but the 14.2% swoon from July 25th to August 8th is a different story. Since 1951, a market decline of 10% or more over 10 days has preceded falling GDP 40% of the time. Three different recessions—1974, 2001 and 2009—are associated with market crashes. Even these bigger, longer falls in equity prices don’t guarantee bad times ahead, though. Markets plunged by 10% or more twice during the late 1990s, yet growth continued to chug along. The biggest ten-day drop of the post-1951 era—a 34.1% dive in 1987—did nothing to derail the American economy. Plunging markets may signal concern about economic conditions, but that concern doesn’t necessarily translate into actual recession.




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