One thing the 2007 recession taught us is how horrible the equity market was at forecasting economic contraction. The S&P 500 peaked in October 2007, just two months before the recession officially began. By contrast the 2001 recession saw the S&P 500 peak nine months earlier.
For whatever reasons this market has become far more short term focused. Macro events have less of an impact on price versus short term technicals or trade set ups. Whether it is due to the explosion of computer algorithm trading, intraday traders, ADHD no one knows.
The following chart highlights the last two recessions. Notice the forecasting ability of both equities and treasuries.
2001 Recession - begins Q1 2001
Treasuries peak January 2000, 11 months earlier
Equities Peak March 2000, 9 months earlier
2007 Recession - begins Q1 2008
Treasuries peak June 2006, 18 months earlier
Equities peak October 2007, 2 months earlier
Treasuries peaked most recently in April 2010, 13 months ago. The S&P 500 so far has peaked May 2011. Economic activity has rolled over since April. Are we looking at economic contraction in the next few months? The treasury market indicates we very well may.
