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Don’t Fear the Double-Dip
08/29/2011 9:30 am EST
While the world wrings its collective hands about a second recession clouding the US economic recovery, don’t waste your time it’s not there, says Jim Collins of Insight Capital.
Concerns over a double-dip recession had stock prices on the retreat again last week. It marked the fourth consecutive week of losses for domestic stocks. The Dow Jones Industrial Average tumbled 4% during this time, while the S&P 500 fell 4.7% and the Nasdaq Composite was pummeled for 6.6%.
Recession fears are not confined to the United States. The debt crisis in many of the Eurozone countries has that continent teetering on the brink of contraction.
Germany announced last week that its economy grew a mere 0.1% in the latest period. This is very significant, since Germany is considered to have the best and largest economy in Europe.
Another recession in Europe will make it that much more difficult for countries like Spain, Greece, Italy, Ireland, and Portugal to deal with their debt crises.
Domestically, economists are predicting the US will avoid another recession. However, the odds have increased, and growth projections have been slashed.
Financial giant JPMorgan Chase (JPM) stoked these fears last week, when its analysts said economic growth would only be 1% in the fourth quarter, down from a previous estimate of 2.5%. A sharp decline in manufacturing activity in the Philadelphia Federal Reserve region only added to investor angst.
The Federal Reserve is holding its annual retreat at Jackson Hole, Wyoming. Fed Chairman Ben Bernanke used the forum last year to outline the Fed’s $600 billion in quantitative easing. A
lthough economic indicators suggest the economy is set to expand, some economists believe the Fed could help the economy along and solidify confidence by announcing another stimulus program.
Compared to a few months ago, growth projections have fallen. This will certainly affect corporate earnings potential.
However, the drop in stock prices has dramatically outpaced any reduced earnings expectations. Investors are treating this as if it was 2008 all over again.
This is not the case, as corporate America—especially banks—are in much better financial shape, and consumers on average have improved their financial lot as well.
Quite simply, stocks are more attractive despite reduced economic expectations. However, one way that today is similar to 2008 is that once conditions improve, you could see a sharp rise in stock prices.
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