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Stock market predicts economic boom

March 12, 2013: 2:08 PM ET

The recent rise in the S&P 500 is either predicting a much better economy ahead than most economists expect, or a worse market.

FORTUNE -- In a perfect market, the economy would be doing a lot better.

Last week, investors cheered the surprisingly good jobs report, which showed that employers had added 236,00 workers to their payrolls in February. The market climbed on the news -- it's now up 13% in the past year.

In fact, investors should have been disappointed. According to the market, the number of jobs added in February should have been nearly 150,000 higher.

There's been a lot of talk recently about the disconnect between the market and the economy. In early March, the Dow Jones Industrial Average hit an all-time new high. That's doesn't seem right with some people. Nonetheless, it turns out the market has been a pretty good predictor of where the economy is headed.

MORE: Gold nears bear market territory

Thomas Lam, the chief U.S. economist at Singapore-based bank OSK-DMG, recently compared the annual return of the S&P 500 in the past 12 months to GDP in the following year. What he found is that the stock market's crystal ball has been pretty good. Last year at this time, for instance, based on past market performance, the S&P 500 was predicting the economy would grow roughly 2.0% in 2012. In the end, the economy grew 2.2%.

Right now, Lam says the market is indicating that the economy will grow 3% in 2013. That would be significantly better than what most economists are currently predicting. The average estimate is 2.4%. Even that, though, could be high. Generally, a monthly increase of about 125,000 jobs is consistent with a 1% gain in the economy. That means even February's surprisingly good number indicates that GDP is on pace to grow at slightly less than 2% a year. What's more, most economists predict that automatic federal spending cuts put in place because of the sequester will cut as much as a half a percentage point of growth from GDP.

All this suggests that either the economy is set to do much better than economists expect, or that the stock market is due for a pull back. Lam's own bet is the latter. His forecast is that the U.S. economy will rise 1.7% in 2013.

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Source: Thomas Lam of OSK-DMG

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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