From a new column I wrote for Yahoo Finance on Tuesday (link):

…stock prices mostly reflect expectations for the future, and not so much what’s happening now or what’s happened in the past.

This is relevant today as the S&P 500 has rallied sharply from its Oct. 12 low, and yet  corporate earnings are deteriorating, economic growth is slowing, and unemployment is expected to rise. Meanwhile, the Federal Reserve is expected to hike interest rates again this week, which should put even more pressure on the economy.

The apparent divergence between the stock market and the economy does not necessarily reflect irrational behavior. Rather, the stock market may just be anticipating a bullish turn in the economy in the weeks and months to come.

Michael Cembalest, chairman of market and investment strategy for JPMorgan Asset Management, explored these relationships in an Oct. 19 research note with some illuminating charts. (Via Michael Batnick)

“There is a remarkable consistency to the patterns shown below: equities tend to bottom several months (at least) before the rest of the victims of a recession,” he wrote.

As you can see, stock prices (dotted blue line) tend to inflect upwards before we see improvements in earnings (red line), GDP (yellow line), and employment (purple line).

Read the whole piece at Yahoo Finance.

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