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Its one of those things you hear your entire career: “Markets always lead economic cycles.” Indeed, I’ve heard this repeated most often by people saying “The markets lead the economy by 6 months to a year.”

What does the data show? It shouldn’t be that hard to figure out what the NBER peak cycle was and to plot that against market highs.

As it turns out, there have been 14 such cycles since 1929. Sometimes, the business cycle peaks before the market does. Most of the times, the market peaks out before hand — but not by as much as you might imagine. The lead has been contemporaneous a few times, or as much as 10 12 months.

The average of these 14 events is just under 3 4 months — 3.79 months.


UPDATE: We had a 1 year error in the spreadsheet for 2000  (breaking in new intern) — I fixed it and updated the chart (old chart is below)


Doh! This is wrong:

Category: Cycles, Data Analysis, Economy, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

8 Responses to “How Much Do Market Peaks Lead Business Cycles?”

  1. Lee Adler says:

    I run comparison charts on a number of broad based economic indicators and have observed the correlation of the timing of market tops and bottoms and economic peaks and troughs to be random and haphazard. As often as not, the economic data leads. There’s no cause and effect here. Both are corollaries of the same cause–the rise or fall of central bank liquidity.

    Here’s an example.

  2. Well, this post makes clear that technical analysis and, in particular the Dow Theory with its +112 years track record, is a good tool to be on the right sight of the market. The graph also cautions us about trusting too much fundamentals. Sadly in many instances fundamentals lag market action and hence relying only in fundamentals can prove costly to the investor. As Dow Theorists Fritz and Shumate wrote in 1939:

    „At times when the price movement seems to give a signal that later proves wrong, the Dow theorist can protect himself by accepting a small loss as the averages go into reverse. Another investor who bought stocks at the same time, because of a trend in carloadings or bank debits, may not be warned of this mistake until it is too late. Current figures of carloadings and bank debits can continue optimistic while stocks collapse; it has happened”.

    This is why I remain skeptical about the bearishness that surround us. While the fundamentals may be horrible, market action which tends to lead, is telling us that the stock market is more likely to go up than down.

  3. Ramstone says:

    John “U.S. economy has already entered a recession” Hussman has a scoop on his hands then.

  4. Lakshman says:

    Hi Barry,

    Great bar chart today. Couple of factoids you may be interested in:

    In 1980, the highest close for the S&P was on Feb. 13, 1980, so the market peak actually lagged the January 1980 business cycle peak by one month. But then it fell only 17% over 30 trading days, so it wasn’t much of a bear market, anyway.

    And then there’s the interesting fact that stock prices didn’t turn down at all around the 1945 recession, or around the 1926-27 recession during the roaring twenties, when it just kept going until 1929.


  5. peachin says:

    Will symbolic memories from the 1950′s come to play (50′s because I was alive and aware) – many of those years and backward beyond – dealt with a National Economy and National Markets… those days are over. There are also “infusers” who play the markets hoping for a “spark” to load up short. International Economics and International Markets – refuse to have a long-term play on each other. What does this all mean (double talk)… I guess “Random and Haphazard” as mentioned by Adler in these comments would be my answer of choice. I would take a “full moon” as a market mover over many of these sophisticated statistical wizards.

  6. There may be discrepancy on how far ahead stock indices lead GDP, but one must remember that GDP announcements by BEA lag by 45 to 105 days. Therefore, it is difficult to gauge if the indices are currently in sync with GDP or due for a correction ‘cuz one simply does not yet have the GDP data with which to compare.

    This highlights the value of accurate GDP forecasts. If one knows where GDP is headed on the (monthly/qtrly/annual) horizon, then one can estimate corporate revenues, then P/E, then index direction.

    When many market players can predict future GDP, the index will be appear to be a leading indicator. But when only a few souls get it right … the index only serves as a coincident indicator.

    Lee Adler’s chart (upthread) does not illustrate the 1.3% drop of industrial production in August. Yet TRI has warned of an Aug/Sept collapse in GDP growth ever since Memorial Day. It remains to be seen whether imminent discovery of a contraction in Q3 will cause indices to correct or they will ignore that minor event in anticipation of cresting GDP in May 2013.

    TRI chart: TRI charts:

  7. clocksun says:


    I’ve always heard that the high yield bond market leads the equity market by 3 – 6 months. Have developed a habit of checking HYG and JNK for a 1 – 2 quarter tell on the SnP. Implicitly makes sense to me … hy is higher in the capital structure that equity, so money transitions from treasures/munis to hy to equities in a bull cycle. As an economic contraction develops, money progressively moves up the cap. structure: equities > hy > USTs/munis.

    I recognize it’s a veeeeery simple analysis of fund flows– and by extension–price trends in the capital markets, but I’ ve done ok moving my weebit of capital in harmony with this line of thinking.

    So Barry, am I way off? … or somewhere in the ballpark?

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