Riddle me this, Batman. Did the market see the recession in October of 2007? We were already in recession and the S&P 500 (see below) was making new highs! Where was the market prescience?

This may be a bit too outside the box for a blog post comment, but if you know how to read the market, yes, the market did signal a breakdown coming between July and August 2007 and reconfirmed it between October and November 2007.

Here’s a chart showing just that, which presents the value of the S&P 500 against its underlying trailing year dividends per share. Here’s the original post from which it came, and here’s the post that explains why the analytical method used turns out to not necessarily be wrong!

Since the NBER declared the previous business cycle to have peaked in December 2007, a point in time which is taken as the beginning of a recession, the evidence confirms that the market did indeed signal the onset of the current recession.

Did it see the 25%+ drop in January of this year? And I could go back and cite scores of examples where the market “missed” the future turning points over the past ten decades.

As for the performance of the stock market in January 2008 is concerned, the answer again is yes, the market anticipated the large decrease in stock prices would begin around 20 January 2009, nearly a year in advance. Not the stock market, though – that was the bond market! The magnitude of the decline was in step with changes in the expected future growth rate of dividends per share – in this case, the dividend futures market was the one that anticipated and ultimately determined how much stocks would actually decline.

Hope this helps!