I've said this in the comments section of a previous post, but if Barry Ritholtz can recapitulate his views, then so can I. Ritholtz points out today, this time quoting Jim Welch, that markets can be wrong:

In 1982, the stock market had spent 16 years going nowhere, which prompted Business Week to publish a cover story entitled “The Death of Equities.” Somehow they didn’t get the market’s message that a 1,200% increase in 18 years was about to commence. When the stock market crashed 22% in one day in 1987, almost double the decline on Black Tuesday in 1929, was the market telegraphing a coming depression? And when the Nasdaq zoomed past 5000 in 2000, was it proclaiming that we had arrived in a “New Paradigm” Paradise? A list of examples showing that markets are always wrong at important turning points could be a very long list.

Concludes Ritholtz:

However, the crowd can easily become an unthinking mob. They tend to be wrong at the worst possible moment, most especially at turning points.

Can you see the slipperiness here? To say that the markets are wrong at turning points is actually a statement with almost zero meaning. Because if you unpack the term "turning points", it means nothing more than a period when the market was wrong.

Markets occasionally turn around: they were going up and then they start going down, or vice versa. In retrospect, it's easy to see where those turning points were. At the time, of course, it's impossible. And saying that "markets are wrong when markets are wrong" is utterly unhelpful in determining whether or not markets are wrong now. Obviously, if this is a turning point, then by definition markets are wrong. But the vast majority of points in time are not turning points, and someone who made bets every day that the market was wrong would rapidly go broke.

Ritholz thinks that markets are bad guides to the economy: He's wrong. They're actually very good guides to the economy. They're not infallible, and with the benefit of hindsight it's very easy to find points in time when they were wrong. But there are precious few economic forecasters who have done a better job predicting the economy than the markets have.

Scenarios for the U.S. Economy in 2007