THE TECHNICAL RECESSION IS ALMOST OVER - DOES IT MATTER?<http://pragcap.com/the-technical-recession-is-almost-over-does-it-matter> 28 July 2009
The technical end of the recession is near. We are going to start posting positive GDP figures in either Q3 or Q4 and at that point everyone and their mother will turn incredibly optimistic about the end of the recession. Many media pundits have already teed themselves up to benefit from this great prediction - as if it is a prediction at all (it’s not). At this point, it’s essentially consensus. But that won’t stop a number of prognosticators from saying “I told you so” when it happens. Unfortunately, this has almost no impact whatsoever on your portfolio and your strategy going forward. We saw the same kind of scenario play out in 2001. GDP posted a positive Q4 print and investors went wild. Unfortunately, the market retrenched and 2002 turned out to be one of the most brutal years of all-time if you were an investor. Regular readers have likely noticed a deep schism between my economic outlook and my market outlook. It’s incredibly important to note that the economy will not always rhyme with markets. You can be in very long secular bear markets and experience incredible rallies (as I believe we’re currently seeing) inbetween. The same goes for bull markets. You can experience sharp contractions in share prices despite a rip roaring bull market. This is why I feel as though it is important to develop a macro view, but always maintain your micro view. The two do not necessarily go hand in hand. Having a directional bias based on your long-term macro view is a recipe for poor stock market returns. David Rosenberg had some detail on the topic this morning: The current consensus forecast for 3Q GDP is 1.0% at an annual rate. But what if we also manage to see a positive print for the second quarter release that comes out on Friday? The consensus is -1.5% QoQ annualized rate, but there is someone out there with a positive forecast (+0.7% — from Ian Morris at HSBC). While the consumer, capex and commercial construction retrenched, there may have been enough oomph out of net trade and lack of a negative contribution out of housing to get us there. It is possible. Go back to the end of the 2001 recession and you will see going into the quarter that followed the 9/11 tragedy that the consensus for 4Q2001 GDP was -1.1% at an annual rate. Well guess what? The advance number came in at +0.2%. That GDP surprise came out on January 30, 2002 and on that day the S&P 500 rallied 13 points (or +1.2%), with the IT sector the top performer, gaining 1.9%, followed closely by consumer discretionary, which rose 1.7%, and industrials rounded out the top three spots, rising 1.2%. Financials were solid, up 1.1% and consumer staples, health care and materials were all up 1.0% on that day. Biggest decliners were telecom (down 1.1%) and utilities (-0.1%). Volatility fell 4.6% and gold was up 1.1%. (In the second round, 4Q2001 GDP was expected to rise 0.9% and when the data came out on February 28, it came in at +1.4%.) Keep in mind that even with that upside surprise in the 4Q2001 data, the rally in the equity market fizzled in the ensuing months as final sales lagged the inventory re-stocking and the economy endured a mini-relapse in the second half of the year. So keep your powder dry — the current rally bears many similarities to the high-hope bounce in late 2001 and early 2002, which means that there will very likely be better opportunities to buy the market down the road. The moral of the story is this: forget what CNBC and the NBER tell you about the end of the recession. At the end of the day we’re all just trying to make money in the market. Economists are notoriously bad investors for a good reason: subscribing to the scientific method of wait and see is the opposite of buying the rumor and selling the news - one of Wall Streets favorite games. The market is a forward looking system. The scientific method is a backward looking approach. If we’re still in a secular bear market the recession could very well end this year and you could still get your face ripped off if you decide to go long stocks into the end of the year. Had you waited for the NBER to announce the official beginning of the recession in late 2008 you would have already experienced substantial share declines and nearly bottom ticked the market. In other words, the technical end of the recession matters very little, but let the media pundits and NBER have their day in the sun - Lord knows it’s not helping them make any money. -- Best Regards, Jay Shah, FRM "Expect The Unexpected" --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en -~----------~----~----~----~------~----~------~--~---
