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It has been argued that the stock market predict recessions. Use quarterly data starting 1961, plot...

It has been argued that the stock market predict recessions. Use quarterly data starting 1961, plot the real value of the stock market index (the Wilshire 5000 index in the last month of the quarter divided by the GDP deflator). Do you think that the stock market performance is a good indicator for recessions?

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The business cycle is the cyclic alteration of increase and decrease in the economic activity. There are four phases of business cycle: the peak, recession, the trough and recovery. The recession occurs when growth rate of economic indicators such as GDP, investment, unemployment, profits falls for two consecutive quarters.

The figure below gives the real value of the stock market index:

real value of the stock market index 1.2 0.8 2016 0.6 0A 2003 2009 0.2

Between 1970 and 2017 there was 7 recession, these are

November 1970
March 1975
July 1980
November 1982
March 1991
November 2001
June 2009

From the figure it is evident that we can only trace one trough sucessfully. Then it can be concluded that the real value of the stock market index is not a good indicator of recession.

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