Are we there yet? A progress report on the recovery.
Economists and the media talk about “green shoots” of recovery, but investors should still be very wary of risk, says this U.S. advisory.
So things are looking better than they were a month ago, eh?
The stock market’s doing better, the economic indicators seem to be turning in the right direction. Economists are actually saying “end of the recession” out loud.
In short, it’s a good time to be skeptical.
What can we really expect in the months ahead? And when things get back to “normal” what will that be? The same sort of bull market we had before? The one powered by the two bubbles that have already burst in this short century.
For a healthy dose of skepticism we turn to Bob Carlson’s Retirement Watch. Mr. Carlson is not easily pigeonholed as a bear or a bull. But he is a realist.
As the name of his advisory suggests, he writes for investors who don’t have the time to indulge in white-knuckle investments. They need to know exactly what they are facing and how they can proceed with as little risk as possible.
And no one should revert to the habits of yesterday, the editor says. “Investors who have done the worst are those who fought hard to stay in their comfort zones. They learned some investment rules during the bull markets and clung to those rules.”
The goal today is still “to preserve capital until it is clear the deleveraging process and its effects are near an end.”
And how close are we to that end?
“Green shoots”
A new expression always seems to crop up to cover each new twist and turn of the economy. “Green shoots” is the latest. “Good, or less bad news is trickling out,” is the way Mr. Carlson defines the term.
“It looks more like a wide trading range to me,” he adds laconically.
Two horrible months on the stock market have been followed by three much better months. Recent economic data in the U.S. is a great improvement on the dismal last quarter of 2008.
Unemployment claims are not as high. Fewer banks are tightening their lending standards. Consumer sentiment is more optimistic. Purchasing managers are venturing back into the market.
And mortgage re-financings are soaring, for heaven’s sake.
“Less bad news”
There’s more. Many companies reported better earnings than expected. Beaten-down stocks such as those of retailers, banks and homebuilders have righted themselves. The spreads between U.S. treasuries and riskier securities have narrowed.
“It is clear that government actions, especially those by the Federal Reserve, have had positive effects,” says the editor. All that money pumped in to sponge up bad debt has been able to slow down the economic collapse that began in 2008.
With more money in their pockets, consumers have started spending. The stock market rally makes investors feel wealthier. The “stress tests” for banks calmed people’s fears.
And commodity prices are rising, which is usually a sign of impending economic growth. Not least, emerging market stocks are moving up.
Feels better, right? “Yet it is ‘less bad news’ rather than good news,” Mr. Carlson insists. “We are not seeing signs the economic decline is over and recovery is on the way.”
“A steady decline”
The fact is, Mr. Carlson states, a great deal of damage was done to the economy over an extended period, and it will take more time to heal it.
Subprime mortgage foreclosures may be past their peak, he says, but more high quality mortgages are going begging due to unemployment.
“The self-reinforcing process of job losses leading to reduced consumer spending and more job losses are still intact.” Businesses adjusted to lower demand by reducing capacity and slashing jobs. That can’t be reversed overnight.
While unemployment claims are below their peak, the unemployed are still having a lot of trouble finding jobs.
The secret of the not-as-bad-as-expected corporate earnings in the first quarter was reduced costs, not increased revenues.
Delinquencies on credit card debt are still rising and much corporate debt needs to be re-financed over the next two years. Commercial real estate in the U.S. has just begun to suffer the effects of the crisis.
“The economy clearly improved over the last few months,” admits Mr. Carlson. “But the improvement is from a free fall to a steady decline.” The Federal Reserve’s actions may have avoided a full economic collapse, but “do not expect strong, sustainable growth soon.”
This report covers the U.S. economy, of course, but we know that this credit crisis is no respecter of borders.
This editor concludes with a final word of caution on the market.
“Bear market rallies tend to be the most powerful and gain 25% to 50% before losing steam. We will preserve capital until the economic fundamentals improve.”
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