Why the Timing of the Next Economic Slump May Surprise – Big Time
“The stock market leads GDP,” not the other way around
by Bob Stokes
Updated: May 25, 2022
Do you recall how many government officials, economists or bankers anticipated the severity of the "Great Recession" before late 2007 into 2009?
Do you recall even one?
If a name doesn't come to mind, that's because hardly anyone of prominence provided a warning. Indeed, just the opposite.
Here's a March 29, 2007 NBC News headline:
U.S. economic growth revised up
Granted, this view by a group of economists was early in 2007, but still -- a historic stock market top was then only six months away and the start of the Great Recession was only eight months down the road.
The public thought the smooth sailing would continue as late as mid-year of 2007.
Look at this quote from a June 20, 2007 Pew Research Center article:
Most Americans expect that the good times will continue for homeowners and sellers.
Alas, the makings of the "subprime mortgage meltdown" were already in place and poised to jar the entire global financial system.
Knowledge at Wharton is the name of a business journal from the Wharton School at the University of Pennsylvania and after the worst of the financial crisis, it offered a May 2009 retrospective with the title:
Why Economists Failed to Predict the Financial Crisis
The whole point is that the worst economic slump since the Great Depression was largely unanticipated. Why? As Elliott Wave International has stated many times, most people tend to linearly extrapolate present conditions into the future. And, those conditions had been largely positive for several years prior to the financial crisis, i.e., a booming housing market and rising stock prices.
It's not the first time financial and economic observers have been sorely surprised, as this Barron's headline states (October 20, 2021):
The 1929 Stock Market Crash Caught Nearly Everyone Off Guard...
Here in May 2022, there are professional economic observers who anticipate a slowdown in the economy but that's not exactly going out on a limb. Meaning, almost everyone and their uncle believe the Fed tightening will cause the economy to slow. Besides, the economy has already contracted. It did so by 1.4% in Q1.
What may surprise is the extent of the next economic slump -- as well as its timing. Almost everyone expects the economy to turn down first and the stock market to follow, but remember that both the Great Recession and the Great Depression developed following historic tops in the stock market. In other words, the bigger the bear market in stocks, the bigger the subsequent economic contraction (conversely, the bigger the bull market, the bigger the economic expansion).
Yes, stocks lead the economy, not follow. The evidence is supplied by a chart and commentary from Robert Prechter's landmark book, The Socionomic Theory of Finance:
The stock market leads GDP. As the stock market fell in Q1 1980 and again in 1981-1982, back-to-back recessions developed. As the stock market rose from 1982 to 1987, an economic boom occurred. After stock prices went sideways to down from 1987 to 1990, a recession developed. As stock prices resumed rising, the economy resumed expanding. As the stock market fell in 2000-2001, a recession developed. As the stock market recovered in 2002-2007, an economic expansion occurred. As the stock market fell in 2007-2009, a recession developed, and it was commensurate with the size of the drop: The largest stock market decline since 1929-1932 led to the deepest recession since 1929-1933. As the stock market has recovered since 2009, an economic expansion has developed.
As you probably know, that recovery in the Dow Industrials and S&P 500 index since the 2009 low extended all the way into January of this year.
If the financial downtrend that's unfolded since then is the start of a big bear market, the next economic contraction may be much more severe than many observers anticipate.
You are encouraged to get our latest outlook for stocks -- and the economy -- by reading our flagship investor package -- The Financial Forecast Service.
Just follow the link below to get started now.
Have You Set Price Targets for Your Investments?
Elliott Wave International's analysts believe price targets are a far better strategy for important portfolio decisions, versus "market feel."
Realize that most investors feel highly optimistic at major tops, and deeply pessimistic at major bottoms. In other words, investors' emotions have historically betrayed them at key turns.
Learn the price targets our Elliott wave experts have set for key U.S. financial markets (including the main stock indexes) -- and why.
Follow the link below to get our latest Elliott wave analysis in this fast-moving market environment.
Reset Your Thinking By Understanding True Market Dynamics
You start by receiving a copy of Robert Prechter's groundbreaking book, The Socionomic Theory of Finance. Thirteen years in the making, STF exposes layers of flawed assumptions and offers you a new approach. The book is jaw-dropping and, at times, an uncomfortable read. STF uses history to painstakingly challenge beliefs. It shows what actually happens in the markets. It does so fearlessly, taking on even the most sacred of assumptions. The book is acclaimed by academics, practitioners and investors alike as a landmark paradigm-setter. It comes in print and online editions and sells for $99. We include it free with your Financial Forecast Service bundle.
Your next step is to be sure to stay alert, on the lookout for danger and opportunity. The Financial Forecast Service equips you to do this.
Your Financial Forecast Service Team Helps Put YOU in Control of the Market’s Trends and Turns
Your Financial Forecast Service guides -- three of the best-known market analysts in the world:
- 1. Robert Prechter, Author of 16 market-related books, New York Times Best-Selling Author and Editor of Elliott Wave Theorist
- 2. Steven Hochberg, Editor of the Short Term Update and Co-editor of The Elliott Wave Financial Forecast
- 3. Peter Kendall, Author of The Mania Chronicles and Co-editor of The Elliott Wave Financial Forecast
As featured in:
Six months of relentless sell-off (on top of war... on top of rising interest rates...) will make a skeptic out of any investor. Yet, every bear market has its rallies. Watch our European Financial Forecast editor give you a preview of the new, July issue -- and explain what he's watching for the signs of a bottom.
When you read the financial headlines these days, it looks like the end of the world. That's the kind of moment when the value of Elliott wave analysis becomes especially clear. Watch our Asian-Pacific Financial Forecast editor give you a preview of the new, July issue as he hints that today's bearish headlines might just be a siren song.
It's hard to believe -- and easy to forget -- that at the onset of the pandemic in April 2020, crude oil prices briefly went negative. Meaning, oil producers would have paid YOU up to $40 a barrel just to take it off their hands. My oh my, how things have changed. Since March, oil prices have risen even more -- but it's been very choppy. See this extraordinary chart that shows how Elliott waves handled the recent volatility.