Not a Recession, But…

09/23/2011 6:30 am EST

Focus: MARKETS

Jon Markman

Editor, Trader's Advantage

Jon Markman, founder of Markman Capital Insight, shares his outlook for the economy, and explains why he thinks we are in a cyclical downturn, but not a new recession.

What is the probability of recession this year?

I think the market is trying to assess that, and that’s the turmoil that we’re going through right now. So, the market is trying to decide whether stocks ought to be priced for a recession or not.

Currently, I think they’ve just about half priced them for a recession. So, this 1,100 to 1,200 level on the S&P, that level suggests that the global economy is in a cyclical downturn and may stay in a cyclical downturn throughout the rest of the year and into next year.

However, a cyclical downturn is not a recession. It is just a slow growth period. If the market decides that we’re going to have a recession instead, then they are going to discount prices even further, and the S&P will go below the 1,000 level...probably as low as 850.

Is this a capital strike? I mean are people just fed up with government not being able to cut the growth?

Well you know, governments are a very important part of the corporate profit picture. Governments spend a lot of money on stuff and to the extent that they won’t be spending as much on stuff because they’ve got to pay down their debts, less money goes into circulation into people’s hands.

Then, additionally to that, if governments decided they need to solve their fiscal problems by raising taxes, again that takes away people’s ability to buy stuff, and it augments the potential for a recession.

Why are the markets just waking up to this today?

That’s a fantastic question, because ECRI, which I think is the best forecaster of the cycles of the economy, forecast a global cyclical industrial downturn in December or January of this year.

What’s been happening ever since is that that cyclical downturn has been continuing, but stocks have been sort of level or slightly higher. It was only really at the end of July, at the end of this most recent earnings season, when companies starting saying “you know what—we had a pretty good last quarter, but next quarter doesn’t look so hot,” that investors started to say we might have a recession coming.

And instead of pricing in a recession for seven months, they decided to get it all down at once. So, instead of having the 18% decline spread over seven months, it got spread over three weeks.

What percentage of assets is in cash versus equities in your model portfolio today?

Through today, yes, it has been in cash since probably the end of July, beginning of August.

And you expect to ride that out pretty much for the rest of the year?

I think right now we’re in the process of price discovery, so ultimately we’re not going to have these periods where it is Dow up 400, down 400, up 400, down 400. Prices will stabilize.

We’re going to be able to look around the environment, and see which companies are able to survive the best in this environment, and we’re going to focus on those and I think that we’re kind of seeing who those are right now already. We’re talking about Apple (AAPL) and the usual suspects: Apple, Amazon (AMZN), IBM (IBM), companies like that.

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