THE STOCK MARKETS CRYSTAL BALL

When the Dow surges, a recession's days are numbered

With the end of the current recession everything but official, the old adage that Wall Street anticipates economic upturns with a bull market has proved itself true once again. (Most economists now agree that the recession ended in January, though the National Bureau for Economic Research, the outfit that decrees on such matters, has yet to rule it is over.)

The stock market began its rebound last August, when the Dow Jones industrial average started its record-breaking climb from 776 to over 1100. At the time, many economists were still gloomy, and unemployment, at 9.9%, was so high that the excitement on Wall Street seemed almost unseemly. But the simple fact, as this chart shows, is that the market is terrific at predicting the end of recessions.

Upturns in the market have presaged recoveries during all eight postwar recessions (indicated above in red). "On the average, the market is five months ahead of an upturn in the economy," says Barton Biggs, chief portfolio strategist at Morgan Stanley & Co., '"and it did it again." Moreover, the market was not fooled last spring, as many economists were, when the economy made a brief uptick, only to sink back into the doldrums.

The Dow has not been nearly as clever at predicting recessions. Sell-offs in 1962, 1966 and 1976 looked ominous, but the economy held up. Says Biggs: "The adage is that the market has predicted nine of the last five recessions." This file is automatically generated by a robot program, so viewer discretion is required.