On the day after the Black Tuesday stock market crash in 1929, John D. Rockefeller criticized the panic sellers. He and his son, he said, were buying, because "there is nothing in the business situation to warrant the destruction of stock values that has taken place."
He was wrong that time, because the nation's economy was in serious trouble even before the stock prices collapsed. But on other occasions in the past half-century he would have been right to ignore the signals from Wall Street. The Dow Jones Industrial Average, the most common measure of stock market performance, has proved to be an erratic barometer of the economic weather.
According to economists and business historians, sharp fluctuations in stock prices do not necessarily presage similar movements in the performance of the economy, and the stock market has lagged behind economic trends as often as it has forecast them.
"The stock market has predicted about 15 of the last nine recessions," said Philip Cagan, professor of economics at Columbia University and former staff economist of the Council of Economic Advisers. The same quip was used by George Perry of the Brookings Institution and has also been attributed to economist Paul Samuelson.
"Timing is important," Cagan said. "Usually the market leads, but sometimes the economy goes down and up again before the market even gets started. There is a theory that you can't use the market to predict economic trends because it reflects forces already at work. It reflects expectations. The problem is that there can be a lot of reasons why expectations can change."
Stock prices often respond to events such as presidential illnesses that have nothing to do with the profitability of industry or the rate of inflation, economists say, and therefore have a poor record as a long-term indicator of economic trends.
According to Arthur Burns, former chairman of the Federal Reserve Board, "declining stock prices have frequently signaled the approach of a recession," but changes in the economy are stimulated more by "the behavior of money, foreign trade and the balance of payments."
"There is no pattern" to stock prices, said Thomas V. DiBacco, a business historian at American University. "You can find whatever you want in the market; it all depends on when you look at it. In 1929 the market was a symptom, but today the market is undervalued and by no means indicates the true state of the American economy, which is in many areas quite good."
DiBacco said the erratic and volatile recent performance of the market was the result of "a lot of paranoia" and of President Ronald Reagan's insistence on measuring economic success by the goal of balancing the federal budget. DiBacco called that measurement "unrealistic."
He said Reagan has "made the budget the battle to be won, but it can't be won. There is no way in the world the budget will be balanced by 1985, but the substance of the economy is quite different."
David R. Sargent, a Boston business executive, said in his book, "Stock Market Prices and Higher Income for You," that "the market always goes to extremes. Don't trust it when everything looks great, and don't despair when all looks bad." Most of the forces that drive down stock prices, he said, are "unforecastable."
He and other economists cited several instances in which sudden surges or declines in stock prices failed to reflect nationwide economic conditions:
In 1937, the Dow Jones average declined about 50 percent in a few weeks. A mild business downturn ensued, but fears that the Great Depression was about to return in full force proved unfounded.
In 1946, fears of a postwar recession drove the Dow down about 25 percent, but no recession occurred. On the contrary, the economy flourished for several years while the stock market remained sluggish.
President John F. Kennedy's feud in 1962 with the steel producers who raised prices in excess of his guidelines drove the Dow down about 25 percent as Wall Street reacted to fears of nationalization or government price controls. Yet the economy was thriving. Several months later Wall Street recovered from its palpitations, and prices rose once again.
Just last year, stock prices rose sharply in spite of a recession, a phenomenon that investment executives say is not uncommon. From mid-April to early June, the Dow Jones average rose from 760 to 850 despite declining business activity, high interest rates and rising unemployment.
"The market has a life of its own," said Brookings' Perry. "Sometimes it reflects a decline that has already started, and sometimes there is a long lead and you don't know if the market's relationship to the economy is causal. The market has some predictive value, of course, but it can be made to look good when on closer inspection its record is shabbier."