Stocks Are Pricing In Double-Dip Recession

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Aug. 4, 2011, 12:00 a.m. EDT

By David Callaway, MarketWatch

SAN FRANCISCO (MarketWatch) -- You know it's going to be a wild day in the market when investors look to Silvio Berlusconi for a pep talk.

The Italian prime minister, speaking to his country's Parliament Wednesday night in Rome, did his best to talk up the markets with pledges of cost cuts, yet he could not change the fact that Italy has become the new Greece. With all that entails.

/quotes/zigman/627449/delayed DJIA 11,896.44, +29.82, +0.25% Long slide reflects economic worries The Dow Jones Industrial Average fell for eight days in a row before rallying on Wednesday.

If it's August it must be time for another chapter of the European crisis. But markets around the world, including in the U.S. these last two weeks, are forecasting something more sinister. The eight-day decline in the Dow Jones Industrial Average /quotes/zigman/627449/delayed DJIA +0.25%  "” snapped Wednesday with a paltry almost 30-point gain "” shows that investors are discounting a new recession next year.

The latest batch of economic reports are almost too weak to digest, though that didn't stop MarketWatch's Washington bureau chief from compiling them into a terrifying summer reading assignment on Wednesday. See chronicle of gloom.

If the payrolls and unemployment numbers on Friday are anywhere near as bad as they are expected to be, then stocks could get even worse next week. Economists predict July's nonfarm payrolls grew by a meager 75,000, and that the unemployment rate stood pat at 9.2%.

Anything weaker than 75,000, or a worst-case scenario of a negative number, could spur a stampede out of equities.

Click to Play $(function () { $("#video_8221D052-3876-4822-8193-F7186FA8E1AA").click(function (e) { e.preventDefault(); MarketWatch.Video.loadAndStartVideo('8221D052-3876-4822-8193-F7186FA8E1AA', 'video_8221D052-3876-4822-8193-F7186FA8E1AA', '287', '162'); }); }); Economic fears sap world markets

Charles Forelle and Michael Casey of the Wall Street Journal join the News Hub to discuss pressures on U.S. and world markets caused by weak economic data. Photo: Reuters

Some pundits claim the market is poised to bounce in coming days as the length of the latest decline has made it oversold. That's probably right. A downgrade of the U.S. debt rating by Standard & Poor's, removing that uncertainty, could be the catalyst, as I've said before. And it's still entirely possible that stocks will come out of this summer with big gains heading into the end of the year.

But the decline in stocks these last several days is a dramatic example of what happens when a market turns.

The last eight-day decline in stocks, which came in October 2008, just a few weeks after Lehman Brothers collapsed, was equally brutal. Stocks did bounce back, but then slid again "” for another five months before hitting the bottom in early March 2009.

The economy is not as shell-shocked right now as it was then. It is on a pronounced downward slide, though, and no amount of Federal Reserve stimulus is going to counteract that, if indeed the Fed proceeds on a new spending program.

Reuters You know you're in trouble when you're counting on Silvio Berlusconi to calm the markets.

For investors, it's important to remember that the stock market is a leading indicator, which means the last two weeks of pain was not so much tied to the U.S. debt talks as to discounting of some future economic calamity, likely a recession.

But just as in early 2009, the market will start rebounding long before it becomes clear that the economy is recovering. For investors hoping to capture those gains, the weakness of the last few weeks provides lots of opportunities in beaten-down sectors.

A MarketWatch list of the worst-performing sectors in the last three months includes airlines, autos, real estate services, and financial stocks among the worst performers, for example. See the sector performance list.

Clothing stocks, Internet companies, gold miners, oil equipment makers, and computer hardware companies make up the best performing list, and might weather a coming storm a bit better.

Wednesday's snap back was a welcome respite from the bloodletting of the last two weeks, but unlikely to be the end of the selling. The market volatility season of August, September and October has arrived right on time this year and investors can look forward to a wild ride before the traditional end-of-year rally.

/quotes/zigman/627449/delayed Add DJIA to portfolio DJIA Dow Jones Industrial Average 11,896.44 +29.82 +0.25% Volume: 198.22M Aug. 3, 2011 4:30p var embeddedchart70394702Chart = new EmbeddedChart('#embeddedchart70394702', NormalChartStyleNoDecimals, 240, 80, '1dy', '5mi', null, null, null, 'US:DJIA'); jQuery.data($('#embeddedchart70394702').get(0), 'embeddedchart', embeddedchart70394702Chart); //$(document).ready(function() { var storywidth = $('#mainstory').width(); var maxwidth = storywidth; $('#maincontent pre').each(function (index, value) { var thiswidth = $(value).width(); if (thiswidth > maxwidth) maxwidth = thiswidth; }); var offset = maxwidth - storywidth; if (offset > 0) { var margin = 13; var blanketwidth = $('#blanket').width(); var contentwidth = $('#maincontent').width(); $('#blanket').width(blanketwidth + offset + margin); $('#maincontent').width(contentwidth + offset + margin); $('#mainstory').width(storywidth + offset + margin); } //});

David Callaway is editor-in-chief of MarketWatch.

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David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A... Expand

David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A financial journalist for more than 20 years, Callaway has worked for Bloomberg News, the Boston Herald, and assorted television and cable stations as a reporter, columnist and commentator. Collapse

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2:29a

Rio Tinto first-half profit surges 30%

2:28a

Lloyds posts loss, sticks to targets

2:25a

AXA net income quadruples, helped by asset sales

2:20a

Rio Tinto ups share buyback program to $7 bln

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Rio Tinto to bring forward Pilbara expansion

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Rio Tinto H1 net earnings $7.6B, up 30%

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S&P/ASX 200 closes down 1.3% at 4,276.50

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Yen slides after Japan intervenes to curb its rise

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Lloyds H1 underlying pretax GBP1.34B vs GBP988M

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Randgold Q2 gold production up 97% vs. year-ago

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Lloyds H1 total income GBP10.85B vs GBP12.59B

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Randgold Q2 net profit $113.3M vs. $34.3M

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Lloyds H1 loss GBP2.31B vs GBP596M profit

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Japan's Nikkei ends up, but off early highs

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Japan's Nikkei ends up 0.2% at 9,659.18

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Japan's Topix closes 0.1% lower at 826.36

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Swiss Re profit up 18%; sees progress ahead

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If it's August it must be time for another chapter of the European crisis. But markets around the world, including in the U.S. these last two weeks, are forecasting something more sinister. The eight-day decline in the Dow Jones Industrial Average /quotes/zigman/627449/delayed DJIA +0.25%  "” snapped Wednesday with a paltry almost 30-point gain "” shows that investors are discounting a new recession next year.

The latest batch of economic reports are almost too weak to digest, though that didn't stop MarketWatch's Washington bureau chief from compiling them into a terrifying summer reading assignment on Wednesday. See chronicle of gloom.

If the payrolls and unemployment numbers on Friday are anywhere near as bad as they are expected to be, then stocks could get even worse next week. Economists predict July's nonfarm payrolls grew by a meager 75,000, and that the unemployment rate stood pat at 9.2%.

Anything weaker than 75,000, or a worst-case scenario of a negative number, could spur a stampede out of equities.

Charles Forelle and Michael Casey of the Wall Street Journal join the News Hub to discuss pressures on U.S. and world markets caused by weak economic data. Photo: Reuters

Some pundits claim the market is poised to bounce in coming days as the length of the latest decline has made it oversold. That's probably right. A downgrade of the U.S. debt rating by Standard & Poor's, removing that uncertainty, could be the catalyst, as I've said before. And it's still entirely possible that stocks will come out of this summer with big gains heading into the end of the year.

But the decline in stocks these last several days is a dramatic example of what happens when a market turns.

The last eight-day decline in stocks, which came in October 2008, just a few weeks after Lehman Brothers collapsed, was equally brutal. Stocks did bounce back, but then slid again "” for another five months before hitting the bottom in early March 2009.

The economy is not as shell-shocked right now as it was then. It is on a pronounced downward slide, though, and no amount of Federal Reserve stimulus is going to counteract that, if indeed the Fed proceeds on a new spending program.

For investors, it's important to remember that the stock market is a leading indicator, which means the last two weeks of pain was not so much tied to the U.S. debt talks as to discounting of some future economic calamity, likely a recession.

But just as in early 2009, the market will start rebounding long before it becomes clear that the economy is recovering. For investors hoping to capture those gains, the weakness of the last few weeks provides lots of opportunities in beaten-down sectors.

A MarketWatch list of the worst-performing sectors in the last three months includes airlines, autos, real estate services, and financial stocks among the worst performers, for example. See the sector performance list.

Clothing stocks, Internet companies, gold miners, oil equipment makers, and computer hardware companies make up the best performing list, and might weather a coming storm a bit better.

Wednesday's snap back was a welcome respite from the bloodletting of the last two weeks, but unlikely to be the end of the selling. The market volatility season of August, September and October has arrived right on time this year and investors can look forward to a wild ride before the traditional end-of-year rally.

David Callaway is editor-in-chief of MarketWatch.

David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A... Expand

David Callaway is editor-in-chief of MarketWatch, responsible for the global news coverage of 100 journalists in 12 bureaus in the U.S., Europe and Asia. A financial journalist for more than 20 years, Callaway has worked for Bloomberg News, the Boston Herald, and assorted television and cable stations as a reporter, columnist and commentator. Collapse

Robert Powell

On Retirement

How the debt deal will affect retirees

Chuck Jaffe

Mutual Funds

"?Wrong' investing strategy is often right

Kristen Gerencher

Vital Signs

New birth-control rules may shake up behavior

David Callaway

Editor's View

Stocks pricing in a new recession

Kevin Marder

Marder on Markets

Don't fall for Wednesday's token advance

Jeff Reeves

Strength in Numbers

5 ugly truths about life after the debt deal

Darrell Delamaide

Political Capital

Voters have the next say in debt debate

Todd Harrison

Minyan Market Musings

The United States blues

Ruth Mantell

On the Job

Read Full Article »