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Simon Constable
March 18, 2010, 12:01 a.m. EDT · Recommend (1) · Post:
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Buy-and-hold dead in stop-and-go economy
First Take "º
Dow industrials join transports in new high ground
By Simon Constable
NEW YORK -- Two savvy researchers I spoke to late last year correctly predicted the economy would see a strong rebound in the fourth quarter.
The good news: There may be even more strength ahead, they say.
Back in the fall, like most people, I was skeptical of the researchers' claims. But I thought the claims were interesting enough to air.
As it turns out, they were right, and my skepticism wasn't borne out. At 5.9%, fourth-quarter economic growth surpassed most aggressive forecasts.
What's more, the researchers say this was no statistical aberration.
Central bank gives an extension to low rates ahead of modest PPI rise, Barrons.com's Bob O'Brien reports.
David Ranson, director of research at H.C. Wainwright Economics, sees the bullish trend getting even better.
"Growth will be even stronger than the 5.9%" we saw for the end of 2009, he explains.
He had based his November prediction on the fact that a key measure of the willingness of investors to take on risk had improved. Specifically, the credit spreads -- the difference between what it costs the most creditworthy corporations to borrow versus what it costs lower-rated firms -- had narrowed sharply.
Historically, a substantial drop in the spread presages a very strong rebound in the economy one and two quarters later.
The great news is that the credit spread has remained pretty narrow, at 1.01 percentage points, only slightly above the recent low of 0.97, Ranson says.
"That's pretty tight." he says. "It suggests there isn't anything seriously wrong with the economy at this stage." That's why he sees the recovery going full-steam ahead.
Meanwhile, the other researcher I spoke with, Anirvan Banerji, director of research at the Manhattan-based Economic Cycle Research Institute, sees the recovery remaining strong, at least for a while. (Not withstanding his more-general prediction of an increased frequency of recessions.)
That optimism is based in part on the strength of ECRI's Weekly Leading Index, which tends to move up and down ahead of moves in the economy. Its growth remains at historically lofty levels, pointing to very strong economic growth.
Neither of these individuals engages in stock picking, but they note which areas of the economy tend to do well as the recovery builds up steam.
Wainwright's Ranson said he thinks the U.S. will see strength manifest with improved sales of "consumer durables." That's big-ticket items, such as washing machines, dishwashers and refrigerators.
"These are the items that consumers can postpone in a downturn, but they can't hold them off forever," he explains.
Meanwhile, Banerji said he thinks that unemployment already peaked for the business cycle and that it will continue to come down. Again, that points to strength in consumer durables and retail: As consumers feel more secure in their jobs, or as the unemployed get new jobs, they'll have more willingness to open their wallets.
Simon Constable is a Dow Jones Newswires columnist and host of the News Hub Web Show. This column first appeared on Dow Jones Newswires.
It's not just Irish eyes that are smiling today.
3:22 p.m. March 17, 2010 | Comments: 10
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