Recession? Not Yet

02/18/2008 12:00 am EST


Jim Lowell

Partner & Chief Investment Officer, Adviser Investments

James Lowell, editor of Jim Lowell's Fidelity Investor, says many signs are pointing towards a recession, but he's looking at one number that would clinch the deal.

The log jam of fundamentals still don't support the case for being in a recession, while the psychological underpinnings perhaps increasingly, do. Stocks remain historically cheap (and getting cheaper). Bonds remain historically overpriced (and heading higher). Cash remains lackluster.

The fourth quarter's GDP [growth] was terrible, but the overall annualized rate for 2007 was one of slow growth, not no growth. But if you look at companies with any multinational play, the case for global growth remains on track. Jobs remain, on balance, fine. Oil has come off its highs. Yet it sounds as if we're heading into the worst of times.

Staying the course, with calm reckoning and maneuvering to take advantage of current events or to reassess one's objectives, makes sense to me. On Wall Street, the opposite remains the case as short sellers have been scrambling to cover their positions in financials, and money managers have been either doubling down or putting some cash to work if the dazed bull gets up and runs.

Right now, that bull is in a precarious position based on what is, as of yet, completely unknown events such as a second leg down for financials or for the jobs-dependent consumer-driven economies here and abroad.

Against that grain, I remain bullish long term, both with regard to the global economy and markets and with specific regard to our own. But, I also remain cautious about any immediate solution to what could be even more meddlesome underlying issues with regard to our economy and markets.

We're prepared. Is the Fed? On January 22nd, the Fed rode to the markets' rescue with an
unprecedented ¾-point cut in short term rates. But by week's end, the concern was whether or not the markets had been crying wolf-in the form of the largest bank fraud ever perpetrated which sent the global markets on what looked like a selling frenzy.

The good news: the Fed did rescue the markets from certain decline on the day and for the week-and then, in the last week of the month, the Fed gave its own answer: it wasn't fooled by one day's worth of international market activity. Instead, it remains concerned about deteriorating conditions in the housing and possibly the jobs markets.

And so, on the heels of the unprecedented, emergency rate cut, we got the widely anticipated and already priced-in 50-basis-point cut this week. [Recently] Fed funds futures are pricing in more than an 80% chance of another 50-basis-point cut when the Fed convenes in March.

I continue to think that jobs are the linchpin to economic activity and that, if we see jobless claims rise and new jobs fall for more than three months in a row, recession will be a foregone conclusion. We're not there yet.

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