How to Spot a Bottom

03/30/2009 12:00 pm EST

Focus: MARKETS

Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and Kiplinger.com

Knight Kiplinger, editor-in-chief of The Kiplinger Letter, says the stimulus plan and other programs should help spur the beginnings of a recovery in the economy and stocks.

Here’s how you’ll know a bottom is near, in a recession turned far uglier than anticipated:
First-time unemployment claims will drop. Consumer spending will have more oomph, boosting retail sales for a few months in a row. Stock market rallies will last for weeks.

Typically, stock markets foreshadow recoveries. This time, though, investors may wait and watch for signs that the government’s efforts are working. The seeds of growth are only being sown—and it’ll be summer before they sprout, nurtured by Washington’s massive efforts to help.

It’ll take months to get stimulus cash spent: $50 billion in infrastructure funds for all 50 states. But paychecks are already getting bigger, with $116 billion headed to workers over two years, thanks to an adjustment in federal tax withholding that was part of the $787-billion stimulus package. Schools will get $44 billion by April, with $56 billion more disbursed this year and next.

Up to $75 billion in mortgage aid is ready, to be used as early as April both for refinancings and to modify loans on homes at risk of foreclosure. Thirty-year fixed rate mortgages are already low at 5%—even as low as 2% for those who qualify for loan modifications.

Private equity groups will team with Treasury in April to remove toxic assets from banks’ books, a key step toward thawing credit and encouraging borrowing. By late spring, the Fed will start doling out more of the $5.6 trillion it pledged in loans and loan guarantees to firms and consumers, easing credit flow.

Faint glimmers of a brighter tomorrow: Energy prices remain low, so average weekly pay gains continue to outpace the rate of inflation. Retail sales gained in January and again in February, excluding auto sales. The dollar remains relatively strong, which is a negative for exporters, but it allows Uncle Sam to continue selling billions of dollars of Treasurys in a currency favored by investors.

Plunging home prices are luring buyers, modestly lifting home sales. That will persist through 2009 as more of the overhang in home inventory is reduced. Investors are beginning to test the waters and wade back into equities. With trillions of dollars sitting on the sidelines, the rally that began on March 10th in major indexes hints at the impatience of some investors to put more cash to work.

There will be plenty of bad news between now and when a recovery begins: Failure of a big bank or the collapse or takeover of a major automaker, for example. The 8.1% jobless rate will keep climbing, even after recovery starts. Jolts to confidence will trigger setbacks. When recovery comes, it will be uneven.

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