Is the Stock Market a LAGGING Indicator?

In early December I had a comment at MarketBeat (which we reprised the next week in "Fears of a million layoffs a month in corporate America"):

The most amazing thing about the reaction of equity market participants has been how slow-motion the reaction has been.
In this day and age, where hedgies and primes factor in geographic distance to shave a couple nanoseconds on execution time, the response to credit market distress, starting in Aug. ‘07 and disseminated to the public at MarketBeat and via other platforms, has been glacial.

With that in mind we’re probably looking at a “Happy Days are Here Again” rally that will be just long enough to suck the sideline dollars in, followed by a depressive “We’re screwed, the economy is worse than we ever thought” final decline of this cyclical bear.
Unfortunately we’ve got another 7-10 years of secular bear. To quote myself (and Warren):

“Folks had better come to grips with the fact that coming out of a cyclical bear still leaves us in the secular variety.

To quote Warren Buffett:

“Now I’m known as a long-term investor and a patient guy, but that is not my idea of a big move.”
-Warren Buffett

December 31, 1964: DJIA 874.12
December 31, 1981: DJIA 875.00
That’s a secular bear market. “

Yesterday Market Movers in their post "Why Aren't Stocks Falling?" said:

As SAR notes, the "longer and deeper recession" meme is "becoming the popular view" -- it's increasingly difficult to find people who really think we'll bounce back in the second half of this year, and economists generally are much more bearish now than they were a couple of months ago.

So why is the stock market up 20% since then?

My feeling, mainstream as it may be, is that stocks are drifting upwards in blissful ignorance of reality, much as they did for nearly all of 2007, even after the credit crisis first hit. The panic sellers and the people desperately needing liquidity have left, volumes have fallen (as they always do around the holidays, no news there), and volatility has decreased. And so both value and momentum players are feeling increasingly comfortable rotating back in to the market.

But if the recession gets to be as bad as people are increasingly expecting, fundamentals will eventually start asserting themselves -- and if we're unlucky, they'll do so in a violent downward manner, much as they did last fall. Remember that the bond market is pricing in a serious wave of defaults -- and I don't think the stock market is....Continued