Consistency Of The Stock Market In Anticipating Economic Cycles

Abstract

This paper examines how consistent the stock market, as measured by the S&P 500 Index, has been in anticipating the effect economic contractions and expansions have on dividends/earnings. In 22 of 26 instances, the S&P 500 reached a peak and trough prior to the beginning and ending of 13 economic contractions during the period 1929-2009. Changes in dividends/earnings are directly related to economic activity as measured by changes in real GDP. An economic recession or expansion lowers or raises the intrinsic value of the expected dividend/earnings stream. Actual stock prices, as measured by the S&P 500, change in the same direction as the change in intrinsic value with the historical evidence showing the high degree of consistency the stock market has in anticipating economic contractions and expansions.