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The Two Indicators That Show the Recession is Ending
By William Patalon III Executive Editor Money Morning/The Money Map Report Investors are being flooded with economic reports, many of them contradictory in nature. From that confusing gaggle, two indicators hint at an upbeat outcome:
Is The Rally For Real? Many of the indicators from recent reports are known as “lagging indicators,” because they are snapshots of the past. That’s true of unemployment, retail sales, gross domestic product (GDP), and most others. But the stock market is “forward-looking,” meaning it tends to factor in expectations about future corporate earnings, income growth, inflation, unemployment and economic output. The unprecedented rally in U.S. stock prices hints at much better times to come. Well, for many, that time may be now. Some favorable corporate reports combined with stronger than expected labor releases (see below) to keep the equity rally alive (and well) and the markets on a nice upward trend. The week started and ended on high notes as both the Dow Jones Industrial Average traded at its highest level since November, while the Standard & Poor’s 500 Index moved to levels not seen since October. The Nasdaq Composite Index continued to lead the surge on a year-to-date basis. All three indexes closed in positive territory for the fourth week in a row. From its early March low of 676.53, the S&P 500 has soared more than 333 points, or 49%, closing Friday at 1,010.48. The Dow is up 43%. The tech-laden Nasdaq is up a scorching 58%. On Thursday, during an interview on cable’s popular financial channel, CNBC, Goldman Sachs Group Inc. (NYSE: GS) celebrity market strategist Abby Joseph Cohen said the S&P 500 Index may rise as high as 1,100 this year, although she warned the move to the top could be rocky. “We do think that’s achievable, but it doesn’t mean we get there in a straight shot,” Cohen told CNBC. Added Cohen:“Even if this is the new bull market, don’t expect it to look like a ‘V.’ Expect it to look like a series of upward steps.” According to a forecast put together by the Goldman strategy team, the S&P 500 should trade in a range of 1,050 to 1,100 toward the end of this year. After bouncing back so strongly from its March lows, the S&P 500 is up 12% so far this year. From Friday’s close of 1,010.48, a run to 1,100 would represent a gain of about 9%. The S&P gained 1.3% Friday. Cohen – one of Wall Street’s true bulls – gained widespread fame in the 1990s for calling the multi-year stock-market rally, according to a New York Times report. “We do think the new bull market has begun,” Cohen told her interviewers. “It may prove that it began in March. Clearly many people were looking for better signs on the economy, and now we’re getting them.” according to a New York Times report. Rebounding corporate profits will be the key catalyst, according to Cohen. She said earnings of $75 a share for the S&P 500 next year are “reasonable” and that the S&P 500 at 1,050 would mean the closely watched index is trading at a Price/Earnings (P/E) ratio of 14. according to a New York Times report. A secondary – but also important – catalyst will be improvements in such key parts of the U.S. economy as jobs and business inventories. Going forward, unemployment – like the stock market – will improve in an erratic manner. The U.S. Labor Department Thursday said jobless claims dropped by 38,000 in the most-recent week, a to a seasonally adjusted 550,000. As we’ll see in a moment, this was an important development. according to a New York Times report. “We are beginning to see improvement even in the labor market, where it appears that the job losses are slowing and there is some job creation going on,” Cohen said. “But let’s keep in mind that labor markets are unlikely to turn all at once or on a dime. We have many more months of difficult labor situation ahead even if the recession … is almost over.” according to a New York Times report. Armed with this information, where should investors be looking? Stocks will perform better than bonds, Cohen said. And within the stock market, Cohen said she favors cyclical sectors such as energy, technology and financials. Of the two indicators we’re highlighting – the stock market and first-time jobless claims – we’ve now examined the market rebound. So let’s turn our attention to first-time jobless claims. These Stats “Claim” the Recession is Ending “For the last couple of weeks, we have been highlighting how the recent trends in initial jobless claims suggest that the recession is over or winding down,” said a research report released a week ago by Bespoke Investment Group LLC. “However, there remains a considerable amount of skepticism towards the market’s rally. Critics contend that any meaningful rally cannot occur until the economy improves. With jobless claims still at high levels, they claim we have not reached that point.” But initial claims don’t support that contention. Since peaking in April, the four-week moving average of initial jobless claims has dropped more than 15%. That’s actually a bigger decline in jobless claims during a recession than in any of the other six economic downturns recorded since 1969. In other words, in the other downturns, Bespoke measured the percentage decline in the four-week moving average of initial jobless claims from their peak until the recession officially ended. That hints strongly that the current recession is over - or at the very least is at or near its end, Bespoke said. That picture only got brighter on Thursday and Friday. On Friday the Labor Department said the nation’s unemployment rate fell to 9.4% in July from 9.5% in June, and the payroll release showed that a lower-than-anticipated 247,000 jobs were lost in July. |
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Even more key was Thursday’s Labor Department announcement that said that first-time filings for state unemployment benefits declined by 38,000 the week before, reaching a seasonally adjusted 550,000. As we showed Money Morning readers last week, it’s this initial-jobless-claims statistic that’s a key indicator to watch in attempting to determine when a recession will end. Economists surveyed by MarketWatch.com had expected initial claims to fall to around 580,000. And the four-week average of new claims dropped to 555,250 – the lowest level since January. Compared with a year earlier, initial claims were up 22%, while continuing claims were up 89%. Compared with six months ago, initial claims have fallen 12% while continuing claims are up 33%. In an interview on CNBC early Thursday morning, one trader looked at the first-time-jobless claims numbers and concluded: “The recession’s over.” |
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IMF Says U.S. Credit-Market Fallout `Likely to Be Protracted' By John Brinsley Sept. 24 (Bloomberg) -- Global economic instability stemming from credit-market turmoil in the U.S. is ``likely to be protracted,'' the International Monetary Fund said five months after predicting little chance of a ``major dislocation.'' ``The potential consequences of this episode should not be underestimated,'' the IMF said in its Global Financial Stability Report released today in Washington. ``Credit conditions may not normalize soon, and some of the practices that have developed in the structured credit markets will have to change.'' The worst housing slump in 16 years is contributing to a surge in foreclosures that's slowed U.S. economic growth and prompted the Federal Reserve to lower interest rates last week. The tightening of credit has made it harder for banks worldwide to raise cash. U.K. lender Northern Rock Plc last week asked the Bank of England for emergency funding. In April the fund reviewed rising mortgage delinquencies and credit conditions more broadly, concluding that a ``major dislocation still appears to be a low-probability event.'' Since then, ``downside risks have increased significantly and even if those risks fail to materialize, the implications of this period of turbulence will be significant and far reaching,'' today's report said. There is likely to be some slowdown in global economic growth, which ``remains solid.'' Emerging markets are likely to suffer disproportionately, given the relative lack of available capital, the report said. ``Private-sector borrowers in certain emerging markets are adopting relatively risky strategies to raise financing,'' the report said. ``Most noticeably, in some countries in Eastern Europe and Central Asia, banks are increasingly using capital market financing to help finance credit growth.'' Capital Costs In the U.S., tougher borrowing conditions could further hurt the housing market, while falling equity prices may reduce consumer spending. Corporate investment may be ``curtailed, owing to a higher cost of capital,'' the report said. The IMF, which is charged with promoting global economic stability and lends to financially distressed nations, blamed the crisis on ``benign economic and financial conditions'' which ``weakened incentives to conduct due diligence on borrowers and counterparties.'' The fund also said the methodology of credit-rating companies, some of which gave high ratings to subprime mortgage securities that have plummeted in value, needs to be examined. The complexity of many of these securities may have made it difficult for investors to assess their worth based on the assigned ratings. ``In the case of complex structured credit products, investors need to look behind the ratings,'' the report said. More Transparency Regulators and investors will have to work together to strengthen financial markets to prevent a recurrence, and develop ways to improve the spread of accurate and timely information to help markets assess risk, the report said. The report concluded that companies have mostly been able to secure financing. ``However, the adjustment period is continuing, and if the intermediation process stalls and financial conditions deteriorate further, the global financial sector and real economy could experience more serious negative repercussions,'' the report said. ``The chances of a more severe tightening of credit conditions cannot be dismissed.'' |
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