Could an equity market correction prolong the nearly decade-long US economic expansion, thus delaying the onset of any recession? It seems like an odd, counterintuitive question but the truth is that a sharp pullback in equities might be exactly what is needed to keep the Federal Reserve from inadvertently throttling the economic expansion with one rate hike too many.
First, the equity market is not always a great indicator of economic recessions. Remember the Great Depression of 1987 and 1988? How about the 1998-99 recession? Or the 2011-12 downturn? If you can’t recall those economic disasters, you’re not alone. They never happened. Sharp selloffs in equity markets, however, did happen: -36% between August 1987 and October 1987; -20% in July and August 1998 and -22% in the summer of 2011. No recession followed on the heels of any of these selloffs.
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