Sunday, February 3, 2008

Correction or Bear Market; Recession or Slowdown?

One of the worst January performances for the stock market is behind us and many investors are wondering just where we stand as we begin February. Are we just experiencing another correction, or are we in the throes of a full fledged bear market? While dipping close to bear levels for an hour on the Tuesday following the Martin Luther King holiday, the market has rebounded well off of those levels recently, despite much weaker than expected employment numbers. With the media and presidential candidates tossing the word recession around like a hot potato, Congress and the President brandishing a $150 billion stimulus plan and the Federal Reserve Chief slashing interest rates like a Samurai, is it any wonder main street investors are wondering what will happen next?

In a speech last week, Hillary Clinton sounded the alarm about the "second Bush recession". The media gave her a complete pass on the statement, because if my memory serves me correctly, The National Bureau of Economic Research confirmed the last recession began in the first quarter of 2001, so it is quite difficult to blame that recession on the current occupant of the White House. Furthermore, there is no confirmation of a recession at this juncture, and many economists believe the current fiscal stimulus being contemplated may well overstimulate an economy that could recover on its own from the current slowdown. So, what is the real deal?

The economy's anemic .6% growth rate for the fourth quarter does indicate a recession is a distinct possibility. A jobs number showing the economy shed 15,000 jobs also is cause for concern. With the credit crunch and housing debacle still raging, it is prudent for policymakers to manage the risk of recession proactively. However, the economic team at JP Morgan Chase recently stated that the current spate of economic stimulus being contemplated is like "risk management on steroids". Ed Yardeni, who heads his own research firm, said it succinctly in a letter to his clients when he noted, "I don't recall so much policy stimulus and so many bailout plans thrown at the economy so fast before there was compelling evidence of a recession". None of the plans being developed will have any impact on the economy in the current quarter or the second. All of the pump priming effects will be felt in the second half of the year.

If all of the doom and gloom predictions of recession turn out to be overblown, and the economy limps along with slow growth through the first half of the year, things just might improve on their own. When all of the monetary and fiscal stimulus kicks in during the second half of the year, the economy could heat up more than anticipated. The Fed could find themselves in the situation of having to raise interest rates to battle reignited inflation.

As I stated in an earlier blog, closing values of 1,252.12 in the S&P 500 and 11,331.62 in the DJIA would indicate a 20% decline for those two indices from their highs in October 2007. Until those levels are reached, we are officially only in a correction. Recessions and bear markets usually occur when most people are unaware of the possibility of their occurance. Perhaps a contrarian position might be the most prudent view to take at the present time.

John Kaighn

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