While recent equity strength appears to be climbing a wall of worry, Bob Savage argues that it will ...
What Bear Market? What Recession?
05/08/2008 12:00 am EST
If you read the papers, go online, or watch television these days, it seems indisputable that the US is in a recession. Some 80% of the American public thinks so, and so do such investment geniuses as George Soros and Warren Buffett.
Meanwhile, many strategists and analysts talk about "bear market rallies" and other such things.
But there's one problem: There's little evidence that we're in either a bear market or a recession, defined, respectively, as a 20% drop in the major stock market averages and two consecutive quarters of negative gross domestic product growth.
Far from just a technical issue, whether we are or not will set the direction of the market in the months ahead and determine whether the recent rally from the March lows continues strongly or peters out.
So, let's go to the videotape, as they used to say.
The bear market issue is the easiest to settle. Unless the Dow Jones Industrial Average and Standard & Poor's 500 index ultimately fall well beneath their January and March lows, we just ain't in one.
From its closing peak at 14,164.53 last October the Dow fell 17% to its closing low on March 10th. The S&P 500 slid 18.4% from its October high to its March low. The broadest measure of the US market, the Dow Jones Wilshire 5000, showed a 19% high-to-low decline. (Using intraday prices it's a closer call.)
In fact, as I pointed out a few weeks ago, the US market has outperformed many of its overseas peers. Want to find a real bear market? Then look to last year's can't-miss superstars, China and India. The Shanghai Composite index lost more than half its value from its all-time high above 6,000, and the Bombay Sensex index declined almost 30% from its peak. That's a bear market.
The reason why the US markets are holding up so well relative to much faster growing parts of the world is that our economy just isn't as bad as the gloom merchants say it is.
Again, let's look at the record.
First, despite the subprime mortgage crisis and a wave of home foreclosures, gross domestic product (GDP) growth was still in positive territory in the first quarter-albeit an anemic 0.6%. It's not worth breaking out the bubbly over that, but it's not a recession, either.
Then there's the Conference Board's index of Leading Economic Indicators, which turned positive in March, after five consecutive negative months. The stock market, which rallied in April, will no doubt help bolster last month's reading. Unfortunately, the LEI has correctly predicted seven recessions since World War II, but also forecasted five others that never happened.
Weekly jobless claims also are considered a good reference point for the health of the economy. If they top 400,000 for a while, some economists say it indicates a recession.
Despite a one-week spike after Easter, the claims have remained comfortably below 400,000-and last week they fell to 365,000, well below economists' forecasts. Contrast that with the 2001 recession, when they moved sharply above that level and stayed there for two years, even topping 500,000 for a while. We still may get there, but again, no sign of it yet.
And oh, yes, the unemployment rate actually dropped a bit in April, to 5%. It averaged nearly 10% in 1982 and 1983, roughly 7% in 1991-1993 and 6% in 2002-2003-during real recessions.
Which brings us to the consumer. Given all that's happened-the housing bust, higher food prices, crude oil over $120 a barrel and gasoline closing in on $4 a gallon, it's no wonder US consumers are feeling besieged. (Alarmist pundits and politicians don't help in this area, either.)
So, it's no surprise that surveys of consumer sentiment are bleaker than the movies that were nominated for Best Picture last year.
In early April, the University of Michigan's consumer sentiment index fell to 63.2, its lowest reading since 1982, when, remember, the unemployment rate was twice as high as it is now. (The Conference Board's survey showed similar results.)
Yet plenty of anecdotal evidence suggests consumers may be tightening their belts, but they're not ready to don hairshirts.
Retailers reported surprisingly good sales in April, although people are doing more shopping at Wal-Mart and Costco and less trading up to Nordstrom.
And last weekend, InterShow celebrated its 30th anniversary by sending all its employees to Disney World. Epcot and the Magic Kingdom were packed to the gills, the hotels were fully booked, and it was hard to get into some restaurants-even in the off-season. And the accents I heard were overwhelmingly American, not British, French, or German.
In fact, Disney reported double-digit increases in theme-park sales in the first quarter, and Richard Kinzel, chief executive of Cedar Fair Entertainment, said amusement-park attendance should hold up well this summer.
And Buffett himself told CNBC that Berkshire Hathaway's Nebraska Furniture Mart did record business last weekend.
So, what does it all mean? Thus far, despite a housing bust, sharply higher oil prices, and many, many warnings, we haven't seen either a recession or a bear market in the US. It still could happen, especially if the credit crunch worsens or oil prices head much higher.
But I don't expect that to happen. In fact, I wouldn't be surprised to see oil prices retreat in the short run as we move into the summer driving season and investors realize we've got very high inventories available. And the actions by Ben Bernanke and the Federal Reserve to restore confidence and add liquidity should keep whatever recession we do have a mild one-or prevent one entirely.
Earlier this year I predicted we'd narrowly avoid a recession and a bear market, and stocks would hit new highs this year. Until we see evidence to the contrary, I'm sticking to my guns.
Howard R. Gold is executive editor of MoneyShow.com. The opinions expressed here are his own and do not necessarily reflect the views of InterShow
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