Don’s Outlook 12/5/08
Stocks ended a five-day rally on Monday with a decline that set the tone for much of the week as investors struggled with poor economic news. Nevertheless, stocks did gain ground on Wednesday and Thursday as bullish technical evidence continues to mount, creating a stronger floor under equities and greater odds of a year-end rally. The three-month slide that we have endured to date ranks in the top 20 for severity dating back to 1896, and it has set several daily records for volatility along the way.
The economic news did worsen this week. Retailers reported large sales declines in November, with many losing more than 10 percent of their sales from last year. Once again, Wal-Mart was a notable exception, but the company’s recent success underlines the economic story unfolding before us. The Big Three automakers are headed back to Washington to beg for taxpayer dollars, while factory orders had their biggest drop in eight years. Employers slashed more than 500,000 jobs in November, the most in 34 years, in an effort to adjust to the changing economic picture.
The National Bureau of Economic Research officially announced the US recession this week, dating the beginning back to December 2007, which only means this recession could last 18 months or longer, virtually guaranteeing that it will be the worst slump since the early 80s, with odds that it will surpass the 16-month recession of the early 70s.
Everyday we come closer to reaching a stock market and an economic bottom, but the date is unknowable. Economic activity will slow further next year, and headlines will become increasingly negative. Unemployment will rise, perhaps back to or even above the 10 percent levels seen in the early 1980s. Stocks are already selling at low valuations, so now is the time for patient and disciplined investing. A recession is a process, and every painful step must be taken in turn or we risk an unsustainable recovery. Furthermore, the stock market recovery will already be underway even as the headlines declare more economic pain is in store. Unemployment will continue rising after the economy begins to recover. For this reason, headline watching can be hazardous to one’s financial health.
The financial shocks from earlier this year led to widespread fear and pessimism that caused severe reactions to perceived risk. The affects on the stock market were, so far, overdone. As I review a 2002 speech from current Fed Chairman Ben Bernanke, I am reminded that the best defense we have against persistent deflation is the US economy. He noted that over the years, the US economy has absorbed financial shocks of all kinds, only to recover and grow anew with increased vigor. We have flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to adapt and embrace technological change, giving us one of the most resilient economies anywhere.
