What History Tells Us When Markets React to Economic Alarm Bells
The market has a history of reacting the wrong way to economic data, but that doesn't mean you can ignore it.
Overview
When the economy's control panel starts to flash red warning lights, the market is usually already moving, pricing in the potential damage before the data confirms it, and then reversing course if the damage never arrives. That tendency will now be tested again. Wholesale prices rose 5.4% in the 12 months through August 2026, and crude oil rose above $100 per barrel on Sept. 15. To complicate matters further, on Sept. 16, the Federal Reserve hiked rates by 0.25%, its first hike since 2023.
These conditions are an uneasy mix for the S&P 500 (SNPINDEX: ^GSPC), the Nasdaq Composite (NASDAQINDEX: ^IXIC), and the Dow Jones Industrial Average (DJINDICES: ^DJI), all of which stand to struggle significantly if those rising prices and rising input costs lead to slimmer margins for businesses or lower demand for goods from consumers. But, as economist Paul Samuelson famously joked in 1966, stocks have predicted nine of the last five recessions. Let's untangle the lessons of history and try to extract some useful principles for thinking about what to expect next.
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Originally published at www.fool.com.