ECRI: The Stock Market Doesn’t Mean There’s no Recession

Lakshman Achuthan and the ECRI are sticking by the recession call they made in September 2011 when Achuthan stated (see video here):

“Our indicators are falling a way that only occurs when a recession is underway or starting”.

“Right now we’re in for a recession”.

Obviously, we weren’t in a recession, but they still see it coming.  And Achuthan doesn’t think the surge in stock prices validates anything:

“But of course, there is the elephant in the room, the impressive upturn in stock prices. How can we possibly be in a recession if the stock market is doing so well?” asks Achuthan. It is important to remember that the stock market is not the economy and the economy is not the stock market.{Stock prices can rise during recession, please see page twelve.}

The Economist recently noted, “It is tempting to attribute the strength of the Dow to optimism about the American economy. Tempting, but wrong. Studies have shown almost no correlation between GDP growth and equity returns…this rally in the Dow has been accompanied by the weakest GDP growth of all the bull markets since the Second World War.”

Achuthan wants people to know that “cycles in economic growth and stock prices do not always move together. It is true that 80 percent of the past 15 recessions has associated equity bear markets, but in three of those 15 recessions there not cyclical downturns in stock prices. Specifically, this happened in 1980, 1945 and 1926-1927.”

Regardless of whether the U.S. economy is in a recession or not, the conversation with Achuthan underscored that the recent euphoria in the stock market should be taken with a healthy dose of cynicism. As Warren Buffett likes to remind us, we should “be fearful when others are greedy and greedy when others are fearful.”

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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