When the stock market got off to a lousy start this year, some analysts fretted that the market’s woes might even contribute to a U.S. economic recession in the coming months.
Such thinking generally goes against conventional wisdom, which holds that stock market trends are mainly just predictive in signaling what might lie ahead for the economy.
But UCLA economics professor Roger Farmer is among those who maintain that a prolonged slump in the market can actually help cause a recession or, conversely, help boost economic growth when stock prices enjoy a long-lasting rally.
We asked Farmer to explain his contrarian position as the market, as measured by the Standard Poor’s 500, stands nearly 3% lower so far this year after trimming its earlier losses. Here’s a condensed excerpt:
The stock market is best known as a “leading indicator” of what might happen with the economy, correct?
That’s correct. There’s information in the stock market that helps to predict what’s going to happen in the economy between three and six months later.