6/29/2011 5:00 PM ET
You'll hear that the recovery is already over. But actually, it's still here, and this bull has room to run. And that, of course, means investors have some good opportunities.
Both the economic recovery and the bull run in stocks are about two years old. But instead of celebrating, investors are acting like the party is over.
People are abandoning stocks and seeking the safety of Treasury bonds on a scale not seen since the upswing began in March 2009. Those sticking with equities are piling into defensive, noncyclical sectors. I predicted as much back in late April (See, "Investors, it's time to run and hide" and encouraged investors to seek shelter in those two areas.
Happily, times are changing. I now believe we are in what economists call a "midcycle slowdown" and that the reduction in the growth rate and slight uptick in the unemployment rate will soon prove temporary. The conditions necessary for a new recession just aren't in place (barring some unforeseen calamity, of course).
Signs of economic recovery
This is halftime for the recovery and bull market. The economy and job growth are set to reaccelerate, and corporate earnings will continue to grow. I expect stocks to push to fresh highs in the months to come. After explaining why, I'll suggest ways to profit from the rise.
Anthony Mirhaydari
I'm not alone in my outlook. Many Wall Street pros are looking for more upside. A recent survey of investment managers by Merrill Lynch found that a majority believed the business cycle is only halfway complete.
Credit Suisse economist Andrew Garthwaite recently listed the reasons he believes the economy will rebound later this year, pulling stocks higher.
For one, new factory orders are still at levels consistent with a normal recovery. Corporate balance sheets are ironclad, thanks to massive cash reserves and record profitability. Jobs are being created, and wages are rising. Inventories are light. Executives plan more capital spending. Home prices have stabilized and are pushing higher once more. And the Index of Leading Economic Indicators is growing at a rate consistent with 4% real GDP growth versus the 1.9% growth seen in the first quarter.
Moreover, emerging-market economies, which have been pulling on the reins to slow growth and combat inflationary pressures, are set to ease their grip. In fact, in the Financial Times, Chinese premier Wen Jiabao just declared victory in his battle against rising prices after a long series of interest-rate hikes and other efforts to control lending growth. Now, the country is looking ahead to new growth initiatives.
Double-dip recessions are exceedingly rare. There have been only a couple of periods since the end of World War I when the economy has fallen back into recession after a recovery of less than two years. The first was in the early 1920s and the second in the early 1980s. The 1960 recession started after exactly two years, so we'll throw that one in, too.
All three cases were marked by monetary tightening and dramatically higher interest rates. From a low of 3% in 1917, the policy rate for the Federal Reserve Bank of New York climbed to a high of 7% in the summer of 1920. From a low of 0.6% in 1958, the effective federal funds rate climbed to a high of 4% in late 1959 before falling back. And from a low of 9% in 1980, the effective federal funds rate jumped to a high of 19.1% before falling back again. All three downturns ended when monetary policy was loosened and rates fell.
With the Fed keeping short-term interest rates pegged near zero (as shown above) and maintaining its holdings of newly purchased long-term Treasury bonds, we clearly don't have the problem of rising rates and monetary tightening.
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If anything, as I described in a recent column ("The Fed's next move: Stealth stimulus"), the Fed is actually increasing the amount of stimulus flowing into the economy as it stands firm in the face of rising inflation. As a result, "real" or inflation-adjusted interest rates are actually falling. I've dubbed the phenomenon "stealth stimulus" because it's a de facto interest-rate cut.
Positive signs are popping upWithout getting into the nitty-gritty, there are already signs that the re-recovery I wrote about two weeks ago ("The economy is recovering -- really") is under way as the temporary drags of the midcycle slowdown begin to fade. Housing starts and building permits rose smartly in May. Non-auto manufacturing output actually increased last month. Weekly jobless claims, which can be volatile, have generally been trending lower, despite occasional surprising spikes. I expect more positive economic data in the weeks ahead.
This recovery, which began about two years ago, is simply too young to die. Since World War II, economic expansions have lasted five years on average. Of course, the recent recession was no ordinary affair -- which explains why this recovery has been so underwhelming.
Major credit-bust recessions tend to result in sputtering, halting recoveries as excessive borrowing and asset price bubbles are worked out of the system. This was the finding of Carmen Reinhart and Ken Rogoff, two academics who compared the U.S. downturn with the five largest financial crises in developed countries over the last few decades. The "big five" include Spain, 1977; Norway, 1987; Finland, 1991; Sweden, 1991; and Japan, 1992. All suffered deeper declines than normal and took longer to bounce back. Sounds familiar, doesn't it?
The housing bust was particularly painful. And it struck at a time of fiscal vulnerability for the public purse.
Now, with households and the government in austerity mode, many of our hopes and dreams depend on private investment spending and inventory restocking. Instead of stimulus packages and buying binges fueled by home-equity withdrawals, we need corporate spending and exports. And we need them now.
To put it plainly: A much smaller part of the overall economy -- the corporate sector and net exports -- has been charged with the task of pushing the overall economy higher. That's like being asked to do push-ups with one arm. It's doable but difficult.
Even under the best circumstances, the current expansion was destined to be painfully slow. Energy price spikes, bad weather, sovereign debt crises, and a hellish earthquake/tsunami/nuclear disaster in the world's third-largest economy have only made it worse.
Yet, according to Morgan Stanley research, the current recovery is actually outpacing the "big five," thanks to aggressive stimulus efforts from governments and central banks. Another critical point is that while post-credit-crisis recoveries are less vigorous than normal, they're typically not any shorter.
Of course, the economy and the stock market are two different animals. Growth affects stocks indirectly via the profit cycle. Yet there is good news here too.
We are now in the 10th quarter of corporate profit expansion in the United States. Since 1949, the average profit expansion has lasted 14 quarters. And the last expansion, which ran from 2001 and 2006, lasted 20 quarters. So we're entering the second half here, to continue the football analogy. By this measure, we have a year or so to go. (Looking ahead, I expect trouble for the market in the summer of 2012 as profits could peak just as the Fed begins to raise interest rates. But the economy should continue to grow until 2014 or so.)
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Words of optimism are always refreshing and we should be grateful for them.
However, the voice of realism says that there are about 14 million people who used to work and ought to be working but can’t anymore for a variety of reasons. There is no shortage of people and therefore no incentive to retrain them. Sadly, they have become permanently unemployable.
So we should really talk about two economies here. The economy of those who have a job and are doing the unthinkable to become unemployed and the economy of those who will never find work again.
The solution to this problem is quite simple and it was proposed by Warren Buffett referring to banks that need to be rescued: “It’s nice to have carrots, but you need sticks. If a bank fails the CEO and his wife should forfeit their net worth.” The idea ought to be applied to all public companies.
Also we need to abolish automatic pay increases for Congressmen. They ought to be paid the median salary Americans earn. If the economy improves, their salaries will to. When we implement these simple, straightforward solutions, earnings will skyrocket and the stock market will follow suit.
2 0ReportSpamacerlow7 hours agoI dunno. He may be right but the market to me still seems overpriced. 4 0ReportSpamActive RIA9 hours ago pure ADD rambling ........ 8 4ReportSpamhavasu469 hours ago Gee, you actually think the Fed and Uncle Ben's mainframes are right and MSN's analyst's charts are lagging. Maybe we do have the right guy in charge of the Fed and the public polls are full of dog poop. 3 6ReportSpamAdd a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. 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Bing: Casey Anthony's father sobs on standBing: Christine Lagarde lands IMF jobBing: Turtles on JFK runway cause flight delaysPrivacyLegalAdvertiseMSN WorldwideHelpAbout our adsFeedbackSite MapRSS© 2011 Microsoft/* ({0})",msgr:"a.msgr",maxcount:9999,axob:"MSNMessenger.Hotmail2Control"});a(b).channelheaderflyout({delay:{open:500,close:50}});a("a.inbox").hotmaillivemenu({hotmailcalendertext:"Calendar"});a("div.websearch2").togglesearchtext({searchInputBoxId:"q4"});a("div.websearch2 form").bindSearch2();a(".myhp").setHomepage({url:"http://www.msn.com",txt:"Make MSN your homepage"})},a.jsUrl)})})(jQuery);jQuery("a.openpopup").async("openPopup");(function(a){a(function(){a.async("asyncCanary",function(){a(".ptnrcnt1").partnerhostedcontentfeature()},a.jsUrl)})})(jQuery);(function(a){a(function(){a.async("asyncCanary",function(){a.lazyLoad.timeout=6e4;a.cookie+=";MUID=";a(".cogr.coss").slideshow({delay:7e3});a(".cogr.cotb").tabGroup({hover:{delay:300}});a("div.ivideo").async("inlinevideo",[{param:{windowless:"true"},asyncp:1}])},a.jsUrl)})})(jQuery);jQuery("a.opennew").async("openNew");jQuery(".pageoptions1").async("pageOptions");jQuery(".pageoptions1 #ausug").async("autoSuggest",[{helpLinkText:"What is this popup",helpLink:"http://help.live.com/help.aspx?project=wl_searchv1&querytype=keyword&query=sihggus&mkt=en-US",formCode:"MSMONY",openNew:"0",market:"en-us",cookieDomain:null,cookiePath:null,inputId:"q4"}]);jQuery(".quotesearchbar0").async("quoteSearchBar");jQuery(".quotesearchbar1").async("quoteSearchBar");jQuery(".quotewatchlist0").async("quoteWatchList0");jQuery(".recentquotes0").async("recentQuotes0");jQuery(".stkscoutrating2").async("financefundamentals");(function(b){var a=b("#nav .breaknews1");if(a.text().length==0)a.css("display","none")})(jQuery)//]]>/*If anything, as I described in a recent column ("The Fed's next move: Stealth stimulus"), the Fed is actually increasing the amount of stimulus flowing into the economy as it stands firm in the face of rising inflation. As a result, "real" or inflation-adjusted interest rates are actually falling. I've dubbed the phenomenon "stealth stimulus" because it's a de facto interest-rate cut.
Without getting into the nitty-gritty, there are already signs that the re-recovery I wrote about two weeks ago ("The economy is recovering -- really") is under way as the temporary drags of the midcycle slowdown begin to fade. Housing starts and building permits rose smartly in May. Non-auto manufacturing output actually increased last month. Weekly jobless claims, which can be volatile, have generally been trending lower, despite occasional surprising spikes. I expect more positive economic data in the weeks ahead.
This recovery, which began about two years ago, is simply too young to die. Since World War II, economic expansions have lasted five years on average. Of course, the recent recession was no ordinary affair -- which explains why this recovery has been so underwhelming.
Major credit-bust recessions tend to result in sputtering, halting recoveries as excessive borrowing and asset price bubbles are worked out of the system. This was the finding of Carmen Reinhart and Ken Rogoff, two academics who compared the U.S. downturn with the five largest financial crises in developed countries over the last few decades. The "big five" include Spain, 1977; Norway, 1987; Finland, 1991; Sweden, 1991; and Japan, 1992. All suffered deeper declines than normal and took longer to bounce back. Sounds familiar, doesn't it?
The housing bust was particularly painful. And it struck at a time of fiscal vulnerability for the public purse.
Now, with households and the government in austerity mode, many of our hopes and dreams depend on private investment spending and inventory restocking. Instead of stimulus packages and buying binges fueled by home-equity withdrawals, we need corporate spending and exports. And we need them now.
To put it plainly: A much smaller part of the overall economy -- the corporate sector and net exports -- has been charged with the task of pushing the overall economy higher. That's like being asked to do push-ups with one arm. It's doable but difficult.
Even under the best circumstances, the current expansion was destined to be painfully slow. Energy price spikes, bad weather, sovereign debt crises, and a hellish earthquake/tsunami/nuclear disaster in the world's third-largest economy have only made it worse.
Yet, according to Morgan Stanley research, the current recovery is actually outpacing the "big five," thanks to aggressive stimulus efforts from governments and central banks. Another critical point is that while post-credit-crisis recoveries are less vigorous than normal, they're typically not any shorter.
Of course, the economy and the stock market are two different animals. Growth affects stocks indirectly via the profit cycle. Yet there is good news here too.
We are now in the 10th quarter of corporate profit expansion in the United States. Since 1949, the average profit expansion has lasted 14 quarters. And the last expansion, which ran from 2001 and 2006, lasted 20 quarters. So we're entering the second half here, to continue the football analogy. By this measure, we have a year or so to go. (Looking ahead, I expect trouble for the market in the summer of 2012 as profits could peak just as the Fed begins to raise interest rates. But the economy should continue to grow until 2014 or so.)
Words of optimism are always refreshing and we should be grateful for them.
However, the voice of realism says that there are about 14 million people who used to work and ought to be working but can’t anymore for a variety of reasons. There is no shortage of people and therefore no incentive to retrain them. Sadly, they have become permanently unemployable.
So we should really talk about two economies here. The economy of those who have a job and are doing the unthinkable to become unemployed and the economy of those who will never find work again.
The solution to this problem is quite simple and it was proposed by Warren Buffett referring to banks that need to be rescued: “It’s nice to have carrots, but you need sticks. If a bank fails the CEO and his wife should forfeit their net worth.” The idea ought to be applied to all public companies.
Also we need to abolish automatic pay increases for Congressmen. They ought to be paid the median salary Americans earn. If the economy improves, their salaries will to. When we implement these simple, straightforward solutions, earnings will skyrocket and the stock market will follow suit.
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