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Do Stock Prices Reflect Economic Growth

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by Felix Salmon
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Nov 29 2007 12:00am EDT

Do Stock Prices Reflect Economic Growth?

What would Nouriel Roubini do if he was faced with the choice between writing something short and writing something bullish? Today he spends almost 5,000 words wondering what will happen to stocks if the US economy goes into a recession. (You'll never guess what direction he thinks they're headed in.) Along the way he revisits what happened to the stock market during the third quarter of this year:

The August liquidity and credit shock severely tested the stock market downward; then you had a first sucker's rally on August 16th when the Fed announced the switch from a tightening bias towards an easing bias. A second phase of this sucker's rally occurred on September 18th when the Fed surprised the markets with a 50bps Fed Funds rate cut rather than the 25bps that the market expected. Then equities kept on rising, in spite of worsening economic and credit news, all the way until October 9th.

I wonder if Nouriel might get out his charts and tell us what he'd expect stocks to do during a quarter in which the economy grows at a 4.9% rate.

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