The New Fear: A Stock Market-Recession Spiral

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Economist Paul Samuelson famously quipped that the stock market had predicted nine out of the last five economic recessions. By this he meant that the stock market tends to be overly pessimistic about the economic outlook.

Before taking comfort in Samuelson’s quip, we might pause to think that there are good reasons to believe that this year’s stock market carnage could very well be one of those occasions. The stock market may well be proved right in thinking that a recession is around the corner. The ongoing stock market decline is now destroying household wealth on a scale that could weigh heavily on consumer and investor sentiment.

In gauging how seriously this year’s stock market’s decline might impact the economy, it is well to recall both how important the stock market has become and how precipitously the market has declined this year.

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By the end of last year, fueled by a decade of ultra-easy Federal Reserve monetary policy, the stock market’s total value reached a record 200% of gross domestic product. This was around 50% higher than its pre-2008 peak.

Similarly impressive has been the size of the stock market’s recent decline. Since the start of this year, in the space of less than six months, the S&P 500 has declined by more than 20% while the tech-heavy Nasdaq has lost more than 30%. This means that over the past six months, more than $9 trillion in stock market household wealth has evaporated….



h/t Guilty-Ham

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