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Picking Up the Pieces

11/11/2008 12:30 pm EST


Jim Lowell

Senior Partner & Chief Investment Strategist, Adviser Investments

James Lowell, editor of Fidelity Investor, says we’ll need to retest the market lows but thinks we’ll avoid the very worst.

After the worst market month in recent memory, we got an even worse one. After all the bailout plans had been put in motion, we saw selloffs remain the rule, not the exception. After assuming that they were somehow an exception to a US recession rule, the international and emerging markets melted down even more dramatically than our own.

The US consumer is the driver not only of our economy but of the global economy, too. With US consumers the linchpin to economies from Kansas to Kuala Lumpur, curing what ails us is the only way to cure what’s ailing the global markets.

As you know, I continue to hope that all that we’re facing from here on out is a classic recession based on an absence of buyers. It’s not that we don’t have $30 in our back pocket when we head to the mall. It’s not that we don’t need a pair of new jeans. But it is that we say to ourselves, “with all the noise about layoffs, crashing home values, and markets, I’ll wait a week and see if the price comes down.”

Whether we’re talking about buying homes, stocks, or goods and services, the above recessionary pattern has cast its shadow over what had been a vibrant, global growth market place. If the pattern persists, deflation (the scourge of the Depression considered by most economists to have been the result of restrictive monetary policy) can emerge.

Deflation is simply too few dollars chasing too many goods over a sustained period. This time around, the Federal Reserve, Treasury Department, federal government, and their global counterparts are pursuing a plan that is diametrically opposed to the way the Depression was handled, exponentially expanding monetary supply and fiscal policy.

History will reveal whether doing so was in fact the right move; the consequences of it not being so could be much, much harder times ahead. The good (!) news: Our markets have already priced in a full-blown domestic and global recession—even in advance of the hard evidence of either.

Do I think we’ll get that evidence? Yes. But it’s more interesting to note that it took our markets (and those of the international and emerging ones) two and half years to price in the last (2000-2002) recession, and this time we’ve priced in a greater recession that has yet to be seen in two and a half months.

I wouldn’t be surprised to see, as a worst-case scenario, the Dow Jones Industrial Average retest 7500 (about 15% lower from end-of-month levels). If we pushed below that (perhaps back to where Allan Greenspan coined the phrase “irrational exuberance” when the Dow was at 6500), that would be the result of a total, global capitulation. I don’t think we’ll go there.

I do think we’ll need to find a floor in the housing markets, [and] we’ll need to stem rising unemployment—currently at 6.5% and potentially heading to 7.5% by this time next year if nothing works. But the odds of nothing working whatsoever are smaller than the slim chance of at least one solution in the logjam breaking in our economy’s and market’s favor.

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