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Features
Weekly Market Strategy
After fearing recession for the last 12 months, the economic news flow is now confirming it. And looking at the numbers coming out of the U.S., this recession could potentially be the most painful since 1982. U.S. consumer spending contracted 3.1% in Q3/08, the October ISM collapsed to a 26-year low of 38.9, and job losses tally 524k in the last two months. For the U.S. economy, Q4/08 and Q1/09 are shaping up as the worst since Q4/81 and Q1/82 when GDP had back-to-back declines of 4.9% and 6.4%, respectively. The economic news flow is likely to worsen in the rest of the world too. The IMF now expects world GDP growth of 2.2% in 2009. We believe this number is still too high. Based on the trend in OECD leading indicators, world GDP growth may dip to the lowest level since 1982. U.S. automakers are on the brink of bankruptcy, the U.S. unemployment rate has inched up to its highest level in 14 years (up to 6.5% in October), consumers and businesses are dealing with the tightest credit climate since the early 1980s, and the MSCI-World is up 11% from its October lows. Investors are partially shrugging off the bleak macro news as equities are bouncing off extreme oversold levels. This bear market rally could take the S&P 500 up to the 1,050-1,100 range. We would raise cash at these levels. As we go from fearing recession to going through recessionary data, these rallies are not out of the ordinary. A retest of October lows remains a high probability scenario before we can muster up more confidence in any rally. Aggressive monetary easing campaigns, improving credit conditions (U.S. Libor spreads are down 264 bp the last four weeks), and stimulus-galore could also explain some of this fragile optimism. Another reason why equities could give the market a break in the near term is that bear market bottoms typically occur when the data is at its bleakest. The S&P 500 bottoms on average eight months before the end of employment recessions. In 1981-82, the worst job loss cycle sinceWWII, the S&P 500 was off its lows five months before job losses ended. YTD, the U.S. has lost over 1.1 million jobs and we expect at least another 1.5 million further cuts in employment over the next 12 months (-125k monthly average). As soon as the monthly average improves, however, equities will likely have already staged their rally. Consequently, if the next three quarters are the worst (Q4/08 through Q2/09), then any early 2009 retest of recent lows should be treated with more optimism.
Vincent Delisle, CFA – Director, Portfolio Strategy