What economic data points should you monitor during a stock market crash?

It's important to note that the relationship between GDP and the stock market is complex and influenced by various other factors, including geopolitical events, corporate earnings reports, and market sentiment. Investors should consider a wide range of economic and financial indicators when making investment decisions, rather than relying solely on GDP figures.

GDP reflects past economic activity, while the stock market prices in future expectations. Investors watch for GDP changes to assess economic health and adjust their portfolios. They also look to projected GDP for recovery signs, with forecasts influencing market confidence and investment. Fiscal measures that potentially boost future GDP can also lead to market rebounds. Hence, future GDP projections are as critical as present figures in market turbulence.

Keep in mind that when people talk about the stock market, they’re usually referring to the S&P 500. While this index represents U.S. companies, these companies generate about 40% of revenue outside the U.S. The stock market is also more goods oriented. But U.S. GDP is more services oriented.

Unemployment rate is a lagging indicator that follows growth and inflation. It tends to have a slow uptick and then rise sharply during a recession. When unemployment rate is at a heightened level, the economy may already be in deep trouble. Headline news often only mentions U3 unemployment rate. Although they tend to go in tandem, one should also pay attention to U1 (chronically unemployed; 15 weeks or longer) and U6 (underemployment) rates. Similarly, unemployment rates should not be interpreted in silo but rather in conjunction with other contexts such as the labor force participation rate. Why else do you think MSM is currently painting a rosy job market but you hear people complain about how crappy the job market is?

The relationship between the inflation rate and a stock market crash is not very straightforward. In some cases, a high rate might spur the central bank to raise rates aggressively, thus putting significant downward pressure on market prices. However, if we're specifically talking about a market crash and not merely a market downturn, crashes typically involve self reinforcing feedback loops where market selling begets more selling, sometimes growing into a market panic that takes on a life if it's own. In some cases, the panic selling is further amplified if there is widespread use of leverage for market participants or in the banking and financial sector. Therefore, inflation may not necessarily be a big driving factor for the crash

We should be careful with how we interpret the signals from consumer confidence. For much of the past three years, sentiment has been very poor, largely due to high inflation. But much of this period has also come with robust job creation and record corporate earnings growth. The stock market has been roaring upward since October 2022. Yet consumer confidence has been weak for much of this period. Keep in mind sentiment is heavily impacted by politics and news, and both tend to be biased in ways that don’t reflect economic realities.

Similarly to the inflation rate, though consumer confidence can have a relationship to the direction of the stock market, its relationship to a generalized market crash is not straightforward. In some cases, market crashes typically involve a feedback loop of "selling begets more selling" that takes on a life of its own and becoming panic selling. In these cases, consumwe sentiment are less likely to spur a market crash by themselves,, though they could theoretically be a contributing factor. The most likely causal relationship might be that the crash itself could potentially impact consumer sentiment negatively, in which case it's an outcome of a crash and not a precursor to one.

Ultimately, positive economic news and corporate earnings can shift investor attention. In that case, the focus back to favorable growth fundamentals can provide a floor under equity market sentiment. The risk with an extended “crash” is a negative feedback loop. Instead of reacting to fundamentals, the market just reacts to itself and ultimately, the sell off itself affects the corporate and economic fundamentals. When you’re faced with a downward spiral like that, my experience is that you’ll need to be on alert for a policy shift, something to refocus investor attention. Typically, this means looser monetary policy (lower rates) or action on the part of fiscal policymakers.

Les indicateurs de nature économique ont un faible pouvoir de prédiction sur les marchés financiers. Ce n'est pas étonnant puisque les marchés devancent l'économie de 3 à 6 mois. En en croisant plusieurs, on peut obtenir des résultats satisfaisant. En revanche, certains indicateurs de marchés sont plus précieux. Largement en tête, la pentification de la courbe des taux possède le meilleur caractère prédictif d'une récession. Et la quasi-totalité des forts marchés baissiers, donc des krachs, ont eu lieu juste avant ou pendant une récession.

Building on Neil Dutta's typically great commentary below, I would add banking sector and financial sector fragility as potential indicators signally risk of a market crash. For instance, the difference between a "garden variety" bear market and a true crash is when a down market metastasizes into a self reinforcing crash. This feedback loop is potentially amplified if there is significant over leverage in the banking and financial sectors as we saw in the 2008 global financial crisis. Similarly, during the 1929 crash, many equity investors were leveraged 10-1, thus being highly vulnerable to the panic selling episode that followed.