Stock Market: Nine Of Five Recessions

(Drivebycuriosity) - “The stock market has predicted nine of the last five recessions” said  Paul Samuelson (wikiquote ). The economist and nobel prize winner was right, double-digit losses and even bear markets (a drop of at least 20%) happened often without an economic downturn (awealthof )  For instance the infamous "Black Monday" crash from October 1987 wasn`t followed by a recession. The US economy grew in 1987 3.5% and accelerated to 4.2% in 1988 (worldbank).

In the short run the stock market behaves randomly and acts often irrational. In the short run stock prices are often driven by sentiment. Financial markets are often influenced by aggressive herding behavior. Falling stock prices can create fear and so induce more people to sell, others follow which could suddenly lead to a snow ball effect.

In the recent days the stock market has been glued to the price of oil and followed its downward spiral. But the oil price collapse is not caused by a lack of demand, it is a response to oversupply. There is plenty of cheap oil - a boon for the consumers worldwide and the majority of the companies.

In the recent days the oil price drop accelerated because the sanctions against Iran got lifted and the big OPEC producer comes back to the market, adding to the oil glut. But the comeback of the Iranian oil production is not surprising. The lifting of the oil sanctions have been many months in the making. Last April I wrote already "that  Iran`s return on the global oil market will increase global oil supply and put additional pressure on the oil price, in other words: The additional supply from Iran will make oil cheaper" (driveby). Last Friday the probability that the Iran will be free to export its oil was at least 90% - so the Iran effect should have been already priced in.

Anyway, falling oil prices don´t cause a recession. The current oil price collapse is a replay of the oil crash of 1986 (driveby). A sudden oil flood caused the oil price to collapse from $30 to $10 (minus 70%  morganstanley). After the 1986`s oil crash followed a period of relatively cheap oil and other commodities which lead to a period of economic growth & prosperity through the year 2000.

This stock market correction is not a harbinger of a nearing recession (calculatedrisk.  The US labor market created almost 300,000 new jobs in December, the weekly jobless claims are close to a 40 years low, the US service sector (about 3/4 of the economy) is growing with a solid speed and cheap oil and other commodities are stimulating the economy.

I reckon that the recent stock market correction is irrational and caused by mass hysteria rather than fundamentals.