Market Watch: Stock Market's Eerie Parallels to September 2007 Should Raise Recession Fears
Article by Sven Henrich in Wall Street Journal Market Watch
Read this paragraph carefully:
Since last year real GDP growth has been slowing. The chair of the Federal Reserve has been signaling that, while growth is slowing, there is no recession risk and the Fed is forecasting continued positive growth. Warning signs in the economy, including an inverted yield curve, have been ignored and stock markets continued to make new highs in July. In August a correction took place and subsequently a rally ensued into early September. On September 18 the Fed is expected to cut rates.
What’s so special about this? This is hardly news. Except that this paragraph would be as true for the U.S. economy and stock market in September 2007 as it is today.
Consider that 12 years ago the yield curve was inverted and U.S. economic growth was markedly slower than it had been in 2006. Yet the S&P 500 made a new high in July 2007 (same as 2019), there was an August correction (same as 2019), and then the Fed cut rates on September 18 (ditto — same day even).
U.S. stocks proceeded to make another marginal high that October — and that was it. Lights out. We all know what happened next.
It seems we are at a curious moment in time. Parallels to late 2007 are running through the markets now. This doesn’t mean the market’s fate will play out as it did then, but the ingredients are there and all that’s needed is a trigger. Perhaps the trigger was the attack on Saudi oil installations last weekend. It’s too early to tell, but clearly this is something to keep in mind.
For starters, the Fed will not tell you when a recession starts. They can and will be in total denial until after the fact. The 2007 recession began one month after Bernanke stated in front of Congress that there wouldn’t be a recession. So when Powell makes the same declaration as the Fed cuts rates again, know that such a statement has absolutely no meaning. “Not forecasting or expecting a recession” he stated on September 6. Is this Powell’s Bernanke moment?
To read this article in Market Watch in its entirety, click here.