So how predictive are big one-day falls of subsequent recession? Not very, as the chart below shows. In almost all big market falls since 1951 (when quarterly GDP figures began) the crash has come in the midst of an economic recovery. In most cases, economic growth continued for several quarters after the crash, with the notable exception of the market collapse in October 2008, which was followed by recession.
Investors have good cause to worry about the valuation of stocks in America. By measures that compare price to average earnings (Robert Schiller’s cyclically adjusted ratio) they look far from cheap. Investors also have reason to worry about the American economy, mainly because it faces considerable fiscal tightening. The one thing investors need not worry about is whether a fall in the former tells us much about the likely