The markets have been crushed over the past few days, with the most common index, the S&P 500, giving up about half of its yearly gains over the past week or so. Recent poor market performance is generally the result of fears of a European slowdown and the effect of corporate earnings, given the amount of revenue multinational corporations generate from overseas.
It’s been a poor weak for investors so we thought we should lighten the mood with a joke. Here it is: “stock markets have correctly predicted 9 of the past 5 recessions.”
Of course, this is a finance joke, so I have to explain it a little. Stock market performance is often regarded as a leading indicator of the real economy. In other words, investors in the stock market can invest or withdraw funds on the possibility or expectation of a recoveries or a downturn, way before any actual facts on spending, revenue generation, or other hard data is determined. As such, a stock market correction like we’ve seen is sometimes regarded as a harbinger of worse times to come. Corporate earnings and profits have been strong and US fundamental data is still reasonably solid. Despite that, the market is reacting to weaker expectations rather than any measurable pattern. The data coming out from Europe and China isn’t great, but there simply isn’t enough data to establish a trend.