The recovery is here, but it could’ve fooled the market.
A surprisingly high reading of the fourth-quarter gross domestic product released on Friday was a welcome sign to economists, but traders appeared to brush it off, and stocks closed out their worst month since February 2009. The Dow Jones Industrial average fell nearly 4% in January as investors weighed the promise of new data against political concerns.
Josh Bivens, an economist at the Economic Policy Institute, on Friday summed up the contradictory message of the Commerce Department’s report that the GDP grew at a better-than-expected rate in the last three months of the year largely due to inventory restocking from brutally depressed levels.
“Today’s report that GDP grew at a 5.7% annual rate is good news, but it’s far too early to break out the champagne and declare ‘recovery accomplished',” he wrote. “Even if this growth rate were to be sustained for three years we would still not create enough jobs to climb out of the hole caused by this recession.”
Absent the bubbly, some pundits made upbeat conclusions while other commentators and strategists urged investors to gird up for more rough sledding.
JPMorgan U.S. strategist Thomas Lee attributed much of the markets’ dismal last few weeks to politics as President Barack Obama excoriated banks and called for more regulation and big repayment fees for the TARP bailout program. He also noted global jitters emanating from the People’s Bank of China and said those obscured genuine promise.
“Equities have taken a severe haircut to reflect the “Washington” discount (reflecting bank plan plus risk of other actions) as well as China risk (due to curbs in lending),” he wrote on Thursday taking a bullish stance in some sectors. “Given some visibility risk on emerging markets (given policy normalization), we prefer domestic cyclicals: financials, small-cap industrials, steels, consumer discretionary, and technology.”
Perennial bear David Rosenberg, chief economist at Gluskin Sheff, looked at the GDP result and other economic data and reckoned the bull investment thesis is, well, bull.
“While the Chicago PMI and the revision to the University of Michigan consumer sentiment index also served up positive surprises, the ‘hard’ data in terms of housing starts, home sales and consumer spending suggest that there is little, if any, momentum heading into early 2010,” he wrote in a Friday note titled “The Houdini Recovery.” “Moreover, the prospect that we see a discernible slowing in the pace of economic activity this quarter and a relapse in the second quarter is non trivial, in my view – by then, today's flashy headline will be a distant memory.”
That’s not to say there isn’t any substance to the positive indicators, but not being deathly ill isn’t the same as getting up and taking a brisk constitutional. “The worst is now officially behind,” as Bank of America Merrill Lynch economist Lori Helwig said Friday, but the corks should stay in the bottles.
Jason Trennert of Strategas Partners offered a measured view in a Friday note. “A good portion of the U.S. economy is consistently remaining in neutral – floors have developed in housing, consumer confidence and business confidence, but we are not seeing sharp recoveries.”
Morgan Keegan economist Donald Ratajczak took a hard look at the spread between the 10-year Treasury bond yield, which closed Friday at 3.58%, and the low federal funds rate. In a Jan. 25 note, he said this spread contributed almost 0.4% a month to leading economic indicators over the past six months. “Any reading under that gain really indicates that something is wrong with the recovery,” he wrote.
The next several months could show how right he and other skeptics are about the recovery being wrong.
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RT @JonathanHoenig: How Not to Create Jobs http://bit.ly/dk4aid $VZ $WMT $GOOG $YUM #Kucinich
RT @JonathanHoenig: How Not to Create Jobs http://bit.ly/dk4aid $VZ $WMT $GOOG $YUM #Kucinich
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