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Macro and capital markets

Nine out of the last five recessions

January 13, 2019
  • MIT Professor Paul Samuelson’s famous quip, “the stock market has predicted nine out of the last five recessions” can now be updated, since he first said this in 1982.

    With a peak-to-trough 20% decline in the stock market as a possible “R” trigger, the tally is now 13 out of the last 7 (in the US). The weak predictive power of a stock market swoon for recession forecasting is similar in other countries as well. The Shanghai Composite Stock index fell 25% in 2018, while China’s growth slowed only marginally from 6.9% in 2017 to 6.5% in 2018.


    The stock market is but one of many macro indicators that tend to affect confidence, whether we are conscious of it or not.


    Blue graphics with a wolf and the words Winter is coming

    The stock market is but one of many macro indicators that tend to affect confidence, whether we are conscious of it or not. A 46% “false positive” rate for these kinds of indicators is typical when it comes to separating capital market and political noise from the “real economy” signals in macroeconomics. Since real estate valuations are linked to both fundamentals and to the fickle capital markets, we must pay attention to static along with true signals that come through. Our “Year in Review Macro Deck” captures both. Aesop was a Greek slave who collected stories and proverbs in the fifth century BCE. One fable tells the tale of a mischievous shepherd who sends out false “wolf” alerts to his local village. When a real wolf shows up and the boy needs help, no one listens. The wolf gets his dinner and the boy is either shamed or eaten, depending on which version is told.

    We sincerely hope that our repeated warnings of rising volatility in the capital markets are not just “crying wolf”. In the fourth quarter of 2018, the diversification power of real estate came to the rescue of many portfolios. Readers of the 2019 ISA know that we emphasized the importance of these “low beta” characteristics, even before we knew about the December stock market sell-off. Perhaps we have been like the northern-dwelling House of Stark, murmuring repeated warnings: “Winter is Coming”1. Nevertheless, our New Year message to all our Macro Deck and ISA readers is this: “After winter cometh the spring, so be of good cheer and hold fast to real estate”.

A graphic shows a mobile phone screen with the words ISA 2019
Jul 16, 2019 2019 ISA Mid-Year Update Thus far in 2019, political headlines have dominated our investment committee discussions and research reports.
Two cargo ships on the background of the world map
Jun 16, 2019 Trade Wars are Here to Stay – How can European Real Estate Investors Build Portfolio Resilience? Until recently, free trade seemed to be a crucial ingredient to the dominant political and economic narrative.
Jun 16, 2019 Slowing international trade Cross-border trade represented 6% of world GDP in 1946; it rose to 23% last year, and in 2019 this ratio is falling.

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