Stock markets don't always wait for the economy.

In his book, It Was a Very Good Year, Martin S. Fridson looks at the U.S. stock market's best years in the twentieth century. It was remarkable that at the beginning of 1975, there was little evidence that the economy or the stock market would do as well as it did.  

The S&P 500 rose 37.21 percent in 1975, a year which saw "the most severe U.S economic contraction since the 1930s". In conjunction with an attack on Israel by Arab states, the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo on the United States in 1973. Oil prices and inflation rose sharply while the economy contracted through 1974. Industrial production declined 15 percent during the 1973-1975 recession as a whole, while unemployment nearly doubled to 9 percent. Although the economy hit bottom in April 1975, full-year earnings per share for the Dow industrials that year declined by 24 percent from 1974.

In spite of high inflation, high unemployment and trouble in the banking system forced the Federal Reserve to ease up on its effort to restrain money supply growth. From a cyclical peak of 8 percent in November 1974, the Fed cut the discount rate in stages to 6 percent in June 1975.

Fridson, however, noted one positive point for the stock market in 1975: the depressed price levels. From its peak of 1051.70 on 11 January 1973, the Dow Jones Industrial Average fell to a trough of 577.60 on 6 December 1974, a drop of 45 percent. By that time, the Dow's dividend yield was 6.12 percent while its price-earnings ratio was 6.2. "As it turned out…extreme financial conditions in 1974 paved the way for a sensational rally," he wrote.