MACQUARIE: A key indicator used by Wall Street to predict recessions has been calling things wrong for decades
A dropping stock market is often flagged as an indicator of an imminent recession, but Australian investment bank Macquarie disputes this hypothesis.
Looking at the past 11 recessions, Macquarie struggled to find any real consistency in the markets before economic downturns.
“We find no clear pattern as to the behaviour of equity prices in the lead-up to recessions,” Macquarie’s team of Ric Deverell, Hayden Skilling, and David Doyle wrote to clients.
When a recession is approaching, one of the first signs that things are starting to go downhill will be a substantial and sustained fall in the stock market. Or so the received wisdom goes.
New research from Australian investment bank, Macquarie, however, found that while its true to say stock markets tend to witness big falls around and during recessions, there’s no real pattern to how they do it — and that, generally speaking, markets fall more during recessions than they do before the start.
Here’s Macquarie’s chart:
“As one would expect, we find that equity prices have historically declined significantly around recessions (as defined by the NBER). However, we find no clear pattern as to the behaviour of equity prices in the lead-up to recessions,” Macquarie’s team of Ric Deverell, Hayden Skilling, and David Doyle wrote to clients.
“We also show that, while the equity market typically declines somewhat from its peak around a recession, most of the decline occurs after the recession has begun,” the continued.
Not only do equities not follow a pattern of decline before recessions, but they have also completely mispredicted recessions several times in recent decades. Macquarie points to several clear examples of major stock market falls from a peak — a widely watched recession indicator — where no recession has actually followed.
“Using a sharp decline in equity prices as an indicator of a forthcoming recession has produced several false signals, …read more
Source:: Business Insider