Recession Tango.

November 1, 2011

All eyes were on Europe this week as the Greek government teetered on the brink of collapse, and European leaders were forced to consider a currency union devoid of Greece.
Remember, the markets and global economies can part ways for extended periods before realigning at the realization of the global economic reality. Many times have we seen the economy head south, while markets continue to appreciate. Conversely, the market has often dropped even as the economy strengthens.
Currently? Both remain interlocked in a frenetic fiscal flamenco. Much movement, in the form of high volatility, has yielded surprisingly little in return. The last three months have seen the S&P 500 gyrate in a volatile trading range of 1100 to 1350. It's like arriving at the store, only to realize that you left your wallet at home. Lots of travel. Nothing accomplished.
Mainstream economists continue to promote the idea that the U.S. will narrowly skirt a recession. And various data points support the idea. Capex spending. Corporate earnings. GDP. Retail spending. All solid.
That may, however, be equivalent to stating that the coast is clear just as the iceberg appears through the fog.
Weak labor data. Falling income levels. Debt inventories and continued de-leveraging. A smoking crater for a housing market. Slowing corporate profits. And don't forget Europe.
Further, it was only last month that the Economic Cycle Research Institute notified clients that the U.S. economy is tipping into a new recession (thought some might argue we never fully escaped the last). The ECRI is notable for having forecasted each of the last seven recessions. What's more, the ECRI analysts stated that "there's nothing that U.S. policy makers can do to head it off."
Because the story, from a market-driven perspective, is never linear. Economic shifts are generally of intermediate time frames of six to twenty-four months. Markets are more short term, three to six months. Translation? Even within a poor economic cycle, the market can incur positive tailwinds.
No guarantees, of course. Yet, investing has nothing to do with guarantees. Investing entails the statistical relationship between risk and reward. Assessing the available data and determining the most likely short- and long-term outcomes. And so enacting to strategies to hedge against, or benefit by, the road ahead.
In October, the S&P climbed 13 percent. Last week, we gave back some of those gains. We anticipate a short-term upward trend that is likely to take us through the holidays. Following, declining earnings growth and the Pandora's Box in Europe will probably pressure markets lower. We will maintain our convictions until we have reason to believe otherwise. Till then, we keep dancing.

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