By: musicwhiz As I was journeying on the bus and the MRT, I was thinking of how accurate the stock market is as a predictor of things to come. The market started its bear run in Oct 2007, and now Singapore is in a technical recession because of 2Q and 3Q 2008 GDP. So in a way, the stock market decline was able to "predict" the recession coming up and price it into share prices. This must be why people say that the stock market is a leading indicator, as it tends to react to future news and expectations even before they materialize and become apparent to the man on the street. The reason for this uncanny ability of the stock market to anticipate economic slowdowns and recessions is due to the fact that most forward-looking news is incorporated into the price through investors/traders expectations of the future. Of course, there are some who argue that it might be a self-fulfilling loop created, whereby people's expectations of others' expectations forms either a positive feedback loop to push prices up or a vicious cycle (like what we are witnessing) to force prices lower. The analogy which Benjamin Graham used of Mister Market is extremely apt as stock markets are the collective actions of millions of participants, al trying to maximize their own gain and all thinking that they are (somehow) smarter than the guy next to them. Normally, all this frenetic activity prices stocks very reasonably and fairly; and on "normal" days the market price can be said to be an accurate reflection of a company's intrinsic value. However, during periods of economic prosperity or depressive gloom, there is a tendency for the market price to over-shoot and land up too high or too low. Let me elaborate on this with respect to the current prevailing sentiment in the world. Read more..