US stock prices imply that U.S. growth rate may turn negative

Stock prices are said to have a leading relationship to economic fluctuations.

In the United States, the year-over-year growth rate of stock prices tends to lead the real GDP year-over-year growth rate by about half a year.

As shown in the figure below, the real GDP year-over-year growth rate is suggested to turn negative.

By the way, the part that is difficult for investors is that ...

What investors want to know is the forecast for stock prices, not the forecast for the economy.

If the economy leads stock prices, you could forecast stock prices by looking at the economy, but that is not the case.

If stock prices lead the economy by six months, to forecast stock prices six months ahead you would have to forecast the economy one year ahead. That is quite challenging.

Nevertheless, it is not completely meaningless, as it is important to verify that stock prices are moving with fundamentals. Also, when the two diverge, overseas factors often influence them. For example, like during the Asian currency crisis.

Instead of the year-over-year real GDP growth rate, looking at an alternative proxy for economic growth such as the ISM index shows that

the year-over-year percentage increase in stock prices and the ISM index are almost in line (no lead or lag).

According to the figure below, the ISM index is suggested to fall to about 46. That is surprising, but it might really happen.

It should be noted that this relationship is well known, and forecasting stock prices by predicting the ISM index is sometimes done.

Finally, let us look at the relationship between real GDP year-over-year growth rate and the ISM index.

It is clear that the ISM index is a proxy for economic growth rate.

Additionally, the ISM index leads real GDP year-over-year growth by six months, but is in alignment with the quarter-to-quarter growth rate of real GDP.

Furthermore, while industrial raw material prices reflect global and U.S. economic conditions, the LMEX nonferrous metals index traded on the London Metal Exchange (LME; London Metal Exchange) (copper, aluminum, lead, zinc, nickel; 1984=1,000) suggests the ISM index is around 53, implying that the current decline in U.S. stock prices may be excessive. Nevertheless, even if it is currently excessive, it seems likely to fall further in the end.