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Stephen Mihm

Bear Markets Don’t Predict Recessions, But Liquidity Might

An insufficiency of buyers and sellers often is a symptom of growing pessimism.
Illiquidity may signal trouble.

Illiquidity may signal trouble.

Photographer: Karim Sahib/AFP/Getty Images

As the world’s equities markets are buffeted by bouts of intense volatility, analysts have started uttering a chilling phrase: bear market. China's markets have entered this territory, and the U.S. might not be too far behind.

That possibility invariably leads to speculation that the declines are harbingers of worse to come, in other words, a recession. This question has attracted relatively little attention from economists and scholars, perhaps because of a memorable takedown by Paul Samuelson. In a Newsweek column in 1966, the famed economist famously quipped that bear markets had a remarkable record as a leading indicator, having predicted “nine out of the past five recessions!”