“Wall Street indexes predicted nine out of the last five recessions! And its mistakes were beauties.”
The Humor Behind the Dismal Science
Economic forecasting often feels like a guessing game. Experts analyze data, yet they frequently miss the mark. Consequently, this unreliability has birthed a specific genre of financial humor. The quote above captures this skepticism perfectly. It highlights a recurring phenomenon where financial markets panic without a valid economic reason. Investors sell off assets in fear, but the broader economy often keeps chugging along. Thus, the stock market signals a disaster that never actually arrives.
This witticism remains timeless because it rings true. We see panic sellers dominate headlines regularly. However, a market dip does not always equal a recession. The quote playfully points out this discrepancy. It serves as a reality check for anyone who blindly follows market trends. Furthermore, it reminds us that human emotion drives stock prices just as much as hard data does. Fear creates false positives. Therefore, seasoned investors learn to laugh at these predictions rather than panic.
Tracing the Origin to Paul Samuelson
Many people repeat this famous line, but few know its true source. Credit belongs to the renowned economist Paul A. Samuelson. He introduced this sharp observation in a column for Newsweek magazine in September 1966. The article, titled “Science and Stocks: Sense and Nonsense,” tackled the relationship between market behavior and economic reality. Samuelson noticed something interesting. He observed that stock prices fluctuated much more wildly than the actual economy did.
In his piece, he critiqued the common belief that markets predict the future accurately. Source Commentators at the time claimed that market declines had successfully forecast four recent recessions. Samuelson, however, found this praise unearned. He argued that this assessment was too generous. Instead, he delivered his famous punchline to correct the record. He quipped that Wall Street had actually predicted “nine out of the last five recessions.”
This specific phrasing was brilliant. It acknowledged that the market did drop before recessions. However, it also pointed out that the market dropped many other times too. By highlighting the “false positives,” Samuelson exposed the flaw in relying solely on stock tickers for economic forecasts.
The Evolution of a Witticism
Great jokes often evolve as they travel. Samuelson’s quip proved so resonant that other writers immediately adopted it. Within months, variations began appearing in newspapers across the country. For example, columnist Katharyn Duff shared a version in a Texas newspaper in December 1966. She attributed the sentiment to The Economist magazine. Her version kept the core math but added a new flavor. She noted that predicting nine out of five recessions was an unbeatable percentage.
Later, other figures adapted the numbers to fit their specific times. In 1968, Alfred L. Malabre Jr. wrote a piece for The Wall Street Journal. He quoted a sarcastic economist who praised the market for predicting “nine of the last four” downturns. This slight tweak in the numbers kept the joke fresh. It also showed how widely the sentiment had spread among financial professionals.
Perhaps the most famous variation came decades later. Source In 1987, economist Lawrence Summers revived the quote during a period of market turmoil. He stated, “The stock market is a terrific economic forecaster. It has predicted 11 of the last five recessions.” Summers used this hyperbole to calm fears after a crash. He wanted to reassure the public that a stock drop did not guarantee a depression. His version increased the ratio, making the market’s track record look even more ridiculous.
Why Markets Cry Wolf
Why does this phenomenon happen? The disconnect stems from what drives stock prices versus what drives the Gross Domestic Product (GDP). Stocks react instantly to news, rumors, and sentiment. Conversely, the real economy moves like a massive tanker ship. It takes time to turn. Therefore, the stock market is prone to “noise.”
Traders often act on immediate fear. If a company misses an earnings report, its stock might plummet. If enough companies stumble, the whole index drops. Suddenly, pundits scream about a coming recession. However, businesses often keep hiring and consumers keep spending. The recession never materializes. The market eventually recovers, realizing it overreacted. This cycle creates the “false positives” that Samuelson mocked.
Additionally, high-frequency trading exacerbates this volatility today. Algorithms react to keywords in milliseconds. A negative headline can trigger a sell-off before a human even reads the article. Consequently, we see “flash crashes” that have zero basis in fundamental economics. These events validate Samuelson’s observation more than ever. The market predicts doom constantly, but the economy ignores the drama.
The Role of “Animal Spirits”
John Maynard Keynes coined the term “animal spirits” to describe human emotion in economics. These spirits explain why the quote remains accurate. Optimism and pessimism drive investment decisions. When investors feel gloomy, they sell. This collective gloom can push markets down 10% or 20%. Technically, this looks like a recession signal. Yet, if the underlying businesses remain profitable, the signal is false.
We saw this clearly during several modern crises. For instance, the market crashed in 1987 (Black Monday). Experts predicted a depression. Instead, the economy kept growing. Similarly, markets dipped significantly in 1998 during the Russian financial crisis. Again, the U.S. economy avoided a recession. These moments serve as historical proof of Samuelson’s jest. The market screamed “fire,” but there was only smoke.
Modern Relevance and Behavioral Economics
Today, behavioral economics studies these irrational patterns. Researchers know that humans feel the pain of a loss more acutely than the joy of a gain. This “loss aversion” causes panic selling. When one investor sells, others follow. This herd mentality creates the phantom recessions that the quote mocks.
Moreover, the financial media cycle amplifies these fears. Bad news sells advertisements. Therefore, every market dip gets framed as the start of the next Great Depression. This constant barrage of negativity makes the market seem like a perfect predictor of doom. In reality, it is often just a mirror of our collective anxiety.
Niall Ferguson, a historian, included a version of the joke in his 2009 book, The Ascent of Money. Source He noted that macroeconomists successfully predicted “nine of the last five recessions.” Ferguson used it to illustrate a sobering truth. Forecasting is incredibly difficult. Even with advanced computers and unlimited data, we still cannot predict the future reliably. The joke is not just funny; it is a warning against hubris.
Conclusion
Paul Samuelson’s witty observation from 1966 endures for a reason. It perfectly encapsulates the volatile relationship between financial markets and the real economy. While stock indexes provide valuable data, they also generate significant noise. They reflect human emotion, fear, and speculation just as much as they reflect economic fundamentals. By predicting “nine out of the last five recessions,” the market proves itself to be an overly anxious watchdog. It barks at everything, including shadows. Smart investors listen to the barking, but they check the window before believing there is a burglar. As long as human nature drives markets, this quote will remain a relevant and humorous reminder to keep a cool head.