The U.S. capital markets have opened 2009 with what seems to be an emerging consensus of an economic recovery of some sort in the second half of the year. Heeding Warren Buffett’s advice not to wait until they can hear the robins (lest spring will already have sprung), investors spent Friday and part of today positioning themselves to be “in” ahead of what would be a very welcome revival in economic activity. But, as BofA/Merrill economist, David Rosenberg, points out, this consensus view might be too early.
Friday’s across the board gains of 3% or so in New York helped push stocks higher in Asia this morning. Most of the bourses in Europe, however, could only manage to hover with modest gains as the opening bell approached in New York . U.S. stocks then opened lower, consolidating the gains registered during the previous three trading sessions. Construction spending figures for November were released thirty minutes into the day, and while they were down 0.6% month over month and 3.3% year over year, the news was actually better than had been expected. Equities proceeded to rally back toward the unchanged mark in response, a level they spent ducking over and under for the next few hours. Stocks headed back to the morning lows as auto sales dribbled out. Like construction spending, auto sales were weak (GM’s sales were the worst in 50 years — see below) but slightly above expectations.
A minor rally into the closing bell left the major averages down for the day, with losses ranging from -0.9% (Dow) to -0.2% (Russell 2000). As they have for the past few days, Treasurys and credit spreads continued to exchange places with each other compared to their performance in 2008. Despite well behaved short dated issues, long dated Treasurys were simply abandoned. The 30 year bond was hit for more than a five point loss (+23 bps in yield — causing 2’s to 30’s to steepen by almost 30 bps — see below), while mortgage and corporate yields fell. The dollar reversed its recent weakness and rallied more than 1% today, but the levitating greenback didn’t hurt commodity prices. The common theme keeping both aloft seemed to be hopes for the Obama stimulus package, as well as disquiet in both the Middle East and between Kiev and Moscow . Despite a 2% drop in precious metals, the rally in the energy complex enabled the CRB index to finish with a gain of almost 1.5%.
Would it surprise any reader to learn that, even after their optimistic forecasts for 2008 came a cropper, economists and strategists in Wall Street were optimistic in their assessment for 2009? This once burned, twice not shy outlook comes courtesy of the standard, post-WW II playbook for recession-wracked markets. Since the 1930’s, the Street’s standard operating procedure for investing during a recession calls for investors to buy stocks after a big decline but well before an economic recovery takes hold. This S.O.P. takes on added urgency if the Fed is aggressively cutting interest rates and if the government is proffering stimulus packages. All of these factors are presently in place, so shouldn’t the prudent investor concur with both Warren Buffett and the endless parade of guests on CNBC who tell them, in essence, that “history is on the side of those who would invest now”?
“No”, is the advice of BofA/Merrill Lynch economist, David Rosenberg (for his list of reasons, see below). Go back a little further in time for historical guidelines, says Mr. Rosenberg, and one will find that economic downturns caused by broken credit bubbles are very different animals than are inventory-based recessions. He thinks that rate cuts and stimulus efforts will help cushion the blow, but he deems the negative wealth effect from falling equity and real estate prices to be an over-arching negative for the U.S. economy in 2009. In addition, Mr. Rosenberg draws comfort from being nearly alone in his pessimism. In his view, consensus forecasts for a second half recovery and gains of 15% or so in the stock market will be just as wrong this year as were consensus forecasts for S&P 1600 last year. While Mr. Rosenberg makes a persuasive case, I think the crowd stands a chance of being right for a short period as 2009 begins. Thinking investors will believe in the post-WW II playbook and turn a blind eye for now to the worsening economic outlook was why I turned short term positive before the end of last year. I do expect Mr. Rosenberg’s views to eventually play out; I just think he, like investors buying stocks during today’s session, will prove to be just a bit too early.
— Jack McHugh