We’ve had it coming for a long time, and now we have to find a way through the mess the politicians have built, writes Jim Lowell of ForbesETF Advisor.
Two years ago, I said it would take until the end of 2011 to know whether the stimulus plans would cure or kill the patient. After nearly two years of market recovery, we’re now weathering what the economic and earnings fundamentals suggest are aftershocks of the worst disruption since the Great Depression.
However, with overall emotive risk levels rising—and one cornerstone of our global marketplace, the Eurozone, cracking toward a double dip—the threat of the past two years’ worth of recovery more closely resembling a period of remission yielding to a recurrence of disease can’t be blithely dismissed.
I do not think this disease is global, or even economic, so much as it is political: born of policy risks that are generations in the making.
Asia is growing to the extent that more than a dozen attempts to slow it down have yet to accomplish the task. Here, we’re a pulse above the flat line in terms of domestic growth, but borderline athletic when it comes to corporate earnings’ ability to jump above the Eurozone’s difficult bar.
Still, healthy and recovering economies like Asia’s and ours are prone to contagion. And the real risk, as I see it, is one of contagion.
This means having to pay close attention to what Germany (in particular) and France can manage, even as I’ll be scrutinizing Italy and Spain (the Eurozone’s 3rd and 4th largest economies) for signs of healing or worsening.
To my eyes, the economies of Germany and France look extremely weak; there’s not enough core growth to stave off at least the increased probability of a double dip. The painful sell-off of recent weeks reflects that increased probability, and its potential for contagion.
There’s an old expression, “Pain is illness leaving the body.” Or, to put it in a Eurozone context, the 14th-century mystic Meister Eckhart wrote, “Pain is the quickest beast to carry you to perfection.”
That’s all well and good, so long as you’re the doctor and not the patient, or so long as you’re the mystic and not the pedestrian. But pain can be a beastly illness all its own, plaguing even a recovering body with a feeling of permanent poor health.
The global markets have taken notice, and delivered their own cure for such events; the sell-off of 15%-plus may be half the loss of an average bear market, or a re-pricing of what could linger as a discomfiting and protracted period of anomalously low growth.
So, the unanswered macro question is whether or not the rising risk of a global recession will trigger an actual one.
There’s no doubt that the global economic outlook has appeared to weaken considerably. I would say it has been weak all along, but the pace of recognizing its weakened state has increased more of late, leading to the question of whether or not the risk of recession has increased (yes) to the point where recession is inevitable (no).
Low growth isn’t no growth, but it isn’t exactly a cure for what ails the confidence to invest for better days ahead. While our own leading economic indicators reflect weakening, they don’t present hard recessionary evidence, even as they contribute to a psychosis about recession that could be self-fulfilling.
Overlooked (ironically), I think that the group that is most prone to what ails our economy—low- to middle-income wage earners—could become the saving grace of it.
As gas prices plummet (the price of oil is off over 25% from the year’s peak), the costs of manufacturing goods and services will decline as well. Suddenly, the driver of the world’s largest economy, the US consumer, is back in the driver’s seat...with fewer tolls to pay along that highway.
Concomitantly, as the cost of creating goods and services dip, corporations should get a bit of a tailwind in terms of their profit margins. Such a tailwind could help offset a low growth environment’s toll on the amount of goods consumed and services subscribed to (with one exception: major oil companies).
In effect, the free market is doing what it has always done (and what our left-leaning politicians always trumpet but never manifest). It’s "taxing" the oil companies, rather than the consumer, in order to yield more money in the consumer’s pocket, which in turn delivers more profits to companies, and hence more taxable revenue to the United States. Free markets, rather than enchained politicians, get my vote.
So, while the markets are likely going down a road that will price in even the overreaction to the fear of realizing a recession, and while we will likely have to suffer through a severe slowdown for months to come, unless and until I see US earnings go negative—and we’re such a far cry away from that point that you’d have to send smoke signals to decipher it—I think we’re in better shape than the current pain would have us feel. But it’s still hard to believe that we are on the mend.
Do I think we’re healing? At the moment, I think we’re prone to worsening rather than taking a turn for the better.
Do I think it’s fatal? Not by a long shot. So, yes, I think we’re healing.
Do I wish that politicians and policy risk would get the economic dosage right and leave their blathering blandishments out of the operating room? You know I do. When facing a tough recovery, you don’t want your doctors fighting amongst themselves.
Unfortunately, and for purely political reasons, that condition is going to worsen as electioneering amplifies a growing divide.
Do I think that the market will be able to see and price through such malarkey? Yes, but not yet. There are too many clouds and so many unknowing that enlightenment is on a wing and a prayer.
Still, by every make or measure and market metric, stocks are cheap (and if they were cheap at 13.5 times forward earnings a month ago, they’re cheaper still at 11.5 times).
But that doesn’t mean they won’t get cheaper. Given the ground covered above, I think we have more to watch out for below.
We have punched through the 15% nadir I had set at the beginning of the year, and then come back to and a bit better than it, but we’re now likely to see another 5% to 10% correction on top of where we have come from.
Selling on the fear of unknown outcomes has a way of escalating rapidly and momentously. Volatility will remain uncomfortably high.
So far, I think we, and the markets, are feeling much like the patient who is recovering, but has to go through bouts of intense pain caused by rehabilitation that is necessary to heal.
It’s not pleasant. It’s not fun. It’s not easy. And all along the nagging fear of never recovering or falling again lingers in the mind like an unwelcome guest.
But there will come a time when, looking back, we see that the time we feared most was the time that healed us best and lastingly.