First let’s get dive deep into these 2 things, Recession and Stock Market. Recession is a lagging indicator, after consumer spending goes down and economic activity slows down, we will see continuous contraction quarter on quarter, after confirming with all the signs, so called committe National Bureau of Economic Research (NBER) will decide that we are in a recession. Since it will take time to calculate GDP and see the reduction in earnings of companies, we may not know quickly whether we are in a recession or not as soon as it hits. As soon as you stop spending on things, companies may not shut down the next coming day, takes some time to reflect the weakness in the form of numbers.
Stock market is a leading indicator because it will always price in the future events. One more thing to add, Stock market does not like the uncertainity. Who would have thought in 2020, market will crash by 50% in a matter of days? When something is new that is yet to happen for the first time, poeple will pull the money, Corona Virus crash is one of such events where market participants are not aware when the economy recovers. In the initial days, India did not see many cases but stock markets already tanked half, in the next couple of months, there are lot of families who are effected with COVID pandemic but stock market rallied like anything and gave more than 100% returns in couple of months. Simple, market will always discount the future but we as an investors might not predict the future, that is the reason stock markets are uncertain and that’s the beauty.
One more observation which proves that stock market and economy may not be in sync even for a greater period of time. UK from 2009 if we consider, it is the worst performing nation in terms of economy. At the same time it is best perfoming stock market in the past decade which implies that both are working inversely.
So, stockmarket is leading indicator and recession is a lagging indicator, cannot tie them up to make investment decisions atleast.
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