After two and a half years of being staunchly bullish, I put out the following bearish call on August 2, 2011:
“Plain and simple, I have become much more bearish about the economic outlook. The anemic ISM Mfg reading + GDP negative revisions = great increase in likelihood of a recession. And now the best case scenario is Muddle Through Growth. But until Muddle Through proves out, then likely people will sell stocks first and ask questions later.”
It certainly was the right call at the time as more economic indicators became negative and the odds of recession increased. With that, the markets continued to tumble and being bearish was very profitable.
That party is now over. And being bearish or believing in a soon-to-occur recession is simply wrong. Here is why…
1-2 Punch = Bears Knocked Out
Punch #1 is that the European situation is now “contained.” The word selection here is important as I don’t believe for a second that the problem has been solved.
You see the European issue is mostly a crisis of confidence that people thought would devolve into a Lehman-type implosion. The Eurozone has shown enough resolve to change any pending implosion into a slow leaking tire.
Meaning that with all their new austerity programs in place and banking haircuts, the odds of European economic growth are next to nil. So the likely European recession will only lead to greater deficits in the future. We can worry about that another day. The key is that the Lehman-type event has been taken off the table. That has allowed investors to concentrate on the next point…
Punch #2 is that there is no recession in the United States. GDP nearly doubled quarter over quarter to +2.5%. Even better is that the quality of where the growth came from bodes well for future quarters.
I don’t really think we will see an acceleration of growth from here. However, it does seem that Muddle Through Growth is on tap for the US and that is plenty good enough for stocks to have an upward bias. That is especially true when:
- Cash pays nothing.
- The 10-year bond is at only 2.4%.
- The PE of the market for next year is at a very reasonable 12.
How Could GDP Be +2.5%
I continue to be amazed by this outcome as well, given that so many economic reports were clearly negative. In particular, the sentiment-based reports were down at levels that had ALWAYS translated into future recessions. Not this time.
Here is my theory on why sentiment and real economic activity went in opposite directions. It’s a bit off beat. So hang in there with me for a minute.
Over the years I have “unfortunately” watched plenty of daytime TV shows with my wife. They love to show people who have destroyed their lives because of credit card addictions.
Then they will bring on some pop-psychologist who talks about how these folks are depressed and buying more things gives them a temporary feeling of elation. So they buy more and more stuff to not be so depressed.
What does that have to do with the US economy, Reity
Business and consumer sentiment plummeted over the last few months. You could say that folks were downright depressed. So maybe they bought more stuff to make themselves feel better at such a time of inner turmoil.
Whether my playful theory is true is not important. Simply, real economic activity is clearly better than sentiment. And likely sentiment will rise in the months ahead with GDP staying north of recessionary territory.
What Is An Investor To Do Now
Over the next 3-6 months the bias will be to the upside. Likely we will challenge the highs of S&P 1370 at some point in that period. Pushing to new highs may also be in the cards.
It’s the immediate picture that is a bit more puzzling. This recent run of +18% may be exhausted followed by a classic 3-5% pullback. However, crossing above the 200 day moving average, as we did tonight, may have cash pouring in from the sidelines. Which is right
Or looking out to later in November the US will be faced, once again, with our own debt debate. The Super Committee will be wrangling over this vital issue. Expect a similar amount of political posturing, as last time, which may weigh negatively on the markets. Maybe not.
Solution: Slowly but surely start adding bullish positions to your portfolio. Don’t look for perfect timing. Just start moving towards being fully invested over the next month. Of course, we recommend a heavy dose of stocks with Zacks #1 and #2 Rankings to increase your odds of success.
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Wishing you great financial success,
Steve
Steve Reitmeister (aka Reity) has been with Zacks since 1999 and currently serves as the Executive Vice President in charge of Zacks.com and all of its leading products for individual investors, including Zacks Ultimate.
