Is the worst over? Some economists see glimmer of hope

McClatchy NewspapersMarch 27, 2009 

WASHINGTON — With the Dow Jones Industrial Average rising around 20 percent over the past few weeks, a down Friday notwithstanding, the question on many lips is whether the stock market has hit bottom and, if so, when might the broader economy follow?

Stock prices often reflect expectations of how the economy will be faring six months or so into the future. If the recent rise in stock prices reflects that the market has bottomed out and is starting a bull run — as some prominent analysts tentatively suggest — that would point to a turnaround for the economy by late summer or early fall.

Few analysts are willing to declare that we've hit bottom without hedging, especially since there's been plenty of premature speculation before about a market bottom during the past 16 months of recession. As if to mock the budding optimism, the Dow closed down Friday by 148.38 points to 7,776.18.

Most analysts now agree, however, that there are some encouraging shafts of light after months of pitch-black news.

"The best news now is that despite the worst . . . daily litany of horrible news, the strongest renewed bank fears, despite all of that, we've got stocks today essentially where they were in October," said James Paulsen, chief investment strategist for Wells Capital Management, owned by the giant bank Wells Fargo.

In October, all three asset classes — stocks, bonds and commodities such as oil and farm products — were in freefall. Today, stocks are up roughly 20 percent in the past two weeks, the biggest such short-term rally since 1938.

"Despite some of the worst news, stocks have stopped deteriorating and have put in what I think is a relatively strong bottom," Paulsen said.

He's not alone in spying a glimmer of hope.

"I think the worst is behind us," said James Dunigan, the managing director of investment for PNC Wealth Management in Pittsburgh.

Dunigan points to recent better-than-expected data on retail sales, which bumped up in January and held in February, as well as an unexpected February increase in sales of existing homes. New data this week showed a 3.4 percent February increase in orders of durable goods — big-ticket expenditures — which added a dose of feel-good.

"You are starting to get some whiffs of that in some of the indicators that are starting to come out. . . . All of the news isn't as consistently bad as we saw," Dunigan said. "I don't think we need to get a lot of good news. We need to get some consistently less-bad news."

The stock market is powered by confidence. When confidence is high, stocks run like a bull; when confidence is lacking, the market hibernates like a bear. Rarely has confidence plunged as in the period after September's collapse of investment bank Lehman Brothers and the government bailout of insurer American International Group. Stocks rose in the first two months after Barack Obama won the presidential election, but slumped badly again from the first of the year through early March.

Since September, however, Federal Reserve Chairman Ben Bernanke has gone into overdrive to reverse the recession. The Fed cut short-term lending rates to zero. It's doubled its balance sheet to $2 trillion by making loans across the economy. Bernanke announced a $1.2 trillion program in mid-March that's designed to drive down mortgage rates, which now are below 5 percent for 30-year loans. That's driving refinancings, which are putting fresh cash in homeowners' hands and sparking home sales.

"There is a pattern here, and it is a positive one for a change," investment analyst Ed Yardeni wrote in a research note. "It seems that economic activity fell so sharply from September through January . . . that some key economic indicators may be starting to bounce off their bottoms for this cycle."

That's why many analysts are beginning to suggest, even if in qualified tones, that perhaps the market's headed up, with the economy to follow by fall.

"I think, frankly, we may have found a bottom for the stock market, although I think we don't go straight up from here," said David Wyss, the chief economist for credit rating agency Standard & Poor's.

It will take the economy longer to recover. The next big test comes on Friday, when the Labor Department reports unemployment data for March. Analysts forecast job losses of 540,000 to 700,000, but job numbers are always a lagging indicator. Unemployment will keep rising for months even after growth resumes, though the monthly totals should grow smaller as recovery takes hold.

In addition, weak corporate earnings reports could continue to weigh on stocks.

"For the consumer, you've got to decrease that (unemployment) number, and for the businesses, you've got to decrease that red ink," said Ken Goldstein, a veteran economist with the Conference Board, a New York economic research group.

Goldstein has long argued that jobs are a huge driver of consumer confidence, and consumer spending drives two-thirds of U.S. economic activity. People who don't have jobs or are worried that they'll lose theirs spend less. Once employers stop shedding so many jobs and show some profits, confidence will return slowly.

"Are we still losing both jobs and profits at the same pace as we did in the fourth quarter (of 2008)? Probably by the second quarter" — which begins in April — "that is going to ease a bit, but we're still going to be losing jobs right on through January of next year," he said. "We're still going to be in red ink through next January."

Plenty can still go wrong, too. Many analysts, including billionaire investor George Soros, fear that defaults on commercial real estate loans may unleash a new wave of economic pain.

In short, analysts clearly differ on whether the glass is half empty or half full, but just weeks ago, all of them saw the glass as near empty.

"In terms of the economy, though, I think we've got another six months of recession. The groundhog is still seeing his shadow," said Wyss, the Standard & Poor's analyst, hopeful that a stock-market bottom points to a recovering economy by October. "If you squint your eyes and look at the charts, we may have found a bottom there."

ON THE WEB

Analysis by James Paulsen of Wells Capital Management

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