As attributed to Paul Samuelson. So, with trepidation, I show the SP500 and CAPE over the last half decade:
Figure 1: SP500 (blue, left scale), CAPE (tan, right scale). NBER defined peak-to-trough recession dates shaded gray. Source: Shiller, NBER.
Even including todays rebound, the SP500 looks like a substantial decline.
And what are movements in the SP500 associated with (in addition to interest rates, VIX):
Figure 2: SP500 close (blue, left log scale), EPU (pink, right scale). Source: FRED, policyuncertainty.com.
The mid-expansion decline in stocks was in response to higher interest rates – the whole risk-adjusted equilibration of asset returns thing. We have already marveled at the economy’s resilience to contractionary monetary policy and the accompanying loss of wealth.
These days, the decline in stocks is not, mathematically, driven by an increase in returns by lowering stock prices. Instead, expected returns have fallen, so prices have fallen in response. In fact, the drop in market interest rates means that stock prices don’t have to fall quite as far to maintain equivalence between returns on debt and equity.
Setting aside the questionable record of stocks as a recession predictor, what else is there to learn from the drop in equity prices? The wealth effect is reduced, and it is the wealthy who have been driving consumer demand most strongly since the labor market cooled off. Capital investment is likely to weaken in response to the decline in expected returns. Between the wealth effect and weaker capital investment, two of the components of GDP are looking shakey.
So we don’t need to look only at the binary question of recession in order to use stocks to assess the economic outlook.
Yes of course, the stock market is too volatile to the downside. But it’s in the Index of Leading Indicators for a good reason. If it keeps making new highs, with the – ahem – notable exception of 1929, you are not having a recession.
Almost always, more or less coincident with the onset of recession, the stock market is down YoY. If you pair it with initial claims YoY, specifically whether the 4 week average is higher by 10% or more YoY, you get a very easy and near flawless indicator.
FRED no longer has permission to post historical stock market data, but I believe this simple indicator has been flawless since at least the turn of the Millennium. And it is based on fundamentals, with one side measuring the production side of the economy, and the other the consumption (jobs and wages) part.
FRED still carries the NASDAQ back to the mid-1970s and yep, your rule still works:
https://fred.stlouisfed.org/graph/?g=1FGVE
I stopped before Covid because it smashes everything down so you can’t tell what’s going on.
Here’s the same picture, but just for the period of the Covid-era expansion:
https://fred.stlouisfed.org/graph/?g=1FGY2
No recession now, nor in Antoni’s “bag of hammers” recession.
Thanks.
“He wrote Economics: an Introductory Analysis in 1948, a text which was regularly revised and continued to stay in common use, going through 17 editions.
In the 1961, seventh edition of his text, Samuelson noted that, at that time, the U.S.S.R. had a gross national product (GNP) which was approximately half that of the U.S. According to Alex Tabarrok, Samuelson projected that, because of higher levels of investment driving faster economic growth, Soviet GNP would outpace that of the United States, perhaps as soon as 1984, but no later than 1997.”
https://www.thevintagenews.com/2018/08/23/soviet-gnp/
This falls directly in line with:
https://www.goodreads.com/quotes/261863-it-s-tough-to-make-predictions-especially-about-the-future
S&P 500 is about 20% overvalued based on median CAPE and dividend yields. A rudimentary Fed Model (differential between earnings yield and 10 year yield) predicts exactly the same thing.
On the other hand, real S&P earnings have not started to drop yet as of last week, which almost always accompanies a correction. So I think the Wile E Coyote moment will last a few more months, at least until Q1 earnings start coming in.
used to be a musk fan, but as I learn more about him my opinion continues to deteriorate. just read an interesting article by will lockett (who’m I have read vary rarely, but have seen before). everybody praises musk and space x. but space x has exploded 7 major rockets in its quest to get large payload starship into orbit. it has not yet done so, and its supposed deadline to get this done has swished on past us. and currently it has announced that its payload will now only be half of what was predicted, because its components cannot handle the original payload forces. seven blown up starships, and still not a single success. now musk claims genius and is this beacon of efficiency change. and very critical of nasa. well 50 YEARS AGO, nasa put the equivalent of starship into orbit and on the moon. and they did it without blowing up a single Saturn rocket. Elon, you are no nasa. and it makes you wonder who is actually willing to sit in that starship commanders seat, while Elon cuts corners to save cash at your explosive expense? so anybody who is buying the Elon doge genius malarkey needs to consider whether they would sit in that rocket seat, considering the preponderance of failure so far achieved Elon. Elon cannot seem to accomplish what nasa did 50 years ago with slide rules and digital calculators. food for thought.
“Elon, you are no nasa.”
True. NASA and Boeing left two astronauts stranded for months in their version of Gilligan’s Island. Musk’s SpaceX has been developing revolutionary rockets and not afraid of early failures. Obviously, they’ve learned from the failures and now are uniquely positioned with reusable rockets and quick turn-around times… something NASA and Boeing can only dream about. The two astronauts said, “Elon, you are no nasa. Thank goodness.”
https://orbitaltoday.com/2025/03/24/spacex-450th-falcon-9-rocket-launch-sets-a-new-record/
I’m amused by those whose opinions of Musk have shifted 180º because he is now involved in trying to make government more efficient and less wasteful. Suddenly he is just a fraud. To them I say pick the reasons you hate Musk:
1) creating and popularizing Tesla EVs which were aligned with saving the planet by replacing fossil fuel vehicles.
2) creating and expanding Starlink satellite communications which were instrumental in restoring communications and internet to Ukraine.
3) creating and improving SpaceX which just brought back stranded astronauts when NASA and Boeing couldn’t get the job done
4) creating the Boring Company which has reduced the time and cost of tunnel infrastructure development.
5) creating and developing Neuralink that holds the promise of restoring autonomy to disabled people.
6) Volunteering his time and the expertise of his top software people to identify and eliminate the waste and inefficiency that has contributed to a $36 trillion national debt.
7) Being a legal immigrant.
Joe Biden had a visionary program: https://www.politico.com/news/2024/09/04/biden-broadband-program-swing-state-frustrations-00175845
Elon Musk already delivered in Ukraine. I’ll bet that $42 billion could provide a lot of Starlink rural high speed internet/communications in the US… and it wouldn’t involve years of laying cable through the wilderness. [#governmentefficiency]
Bruce Hall Musk’s problem isn’t that he isn’t smart enough; it’s that he thinks he’s the smartest guy in the room regardless of the subject. Musk obviously has a strong engineering mind with a lot of businessman energy. He’s been very successful at many of the things he’s tried. But he’s also been spectacularly unsuccessful in other things; e.g., marriage and interpersonal skills. You’ve really got to work at it to go through three wives in less than a decade. His intelligence matches his personality…quite lopsided. When it comes to government efficiency he’s simply way out of his depth. For example, as a businessman he’s likely to think that cutting costs is always efficient, but businessmen often don’t realize the difference between cost cutting and cost shifting. To them the effect on the private bottom line is the same. In government you have to be sensitive to the difference. He also has a cramped understanding of efficiency. There’s a difference between making the government more efficient (less inputs for the same output) and making the macroeconomy more efficient. Musk is focused on the former and seems oblivious when it comes to the latter. Firing government workers might or might not make the government more efficient, but if those workers are unable to find private sector jobs that yield a value of marginal product that is at least equal to the value of marginal product in their government jobs, then the macroeconomy is operating less efficiently. And it’s the macroeconomy that counts, not the government sector in isolation. That’s called suboptimization, something that in my personal experience is a common affliction among private sector managers. Musk also shares another trait common among megalomaniacs. When shown that he’s simply wrong on an objective fact (e.g., the age of SS retirees), he refuses to admit error. Instead, he doubles down and tries to retaliate against those who would dare to correct him. His ego is simply too fragile to accept the fact that he’s not omniscient. Then again, he shares that same trait with another megalomaniac.
BTW, Starlink is VERY expensive…much more expensive than fiber optic cable. And it’s quite slow and has never achieved its benchmark speed:
https://www.cnet.com/home/internet/starlink-doubled-its-users-in-2024/
And when it comes to that $42B infrastructure money, Musk is right there at the trough arguing for Starlink to get some of the money. As to government efficiency, laying fiber optic cable is a private sector thing, not the government. And that $36T debt wasn’t caused by government inefficiency; it was caused by politicians who couldn’t resist tax cuts for conservative voters who want lots of goodies but don’t want to pay for any of them.