The pre-Easter mini-rally was over all too quickly when traders’ confidence nosedived in response to negative housing and consumer data released in the third week of March. The Standard & Poors (S&P)/ Case Shiller Home Price index logged a record drop in prices falling to its lowest level since tracking began in 1987 and, in a separate report, the Consumer Confidence Index fell for the fourth month in a row. Now the big question for traders and individual investors is will this recession (few analysts are calling it anything else now) end soon? Some believe that this recession will be relatively mild and brief but others see a more severe, prolonged downturn. We are in a period of turmoil marked by wild market swings when no expert's prediction or observation remains relevant for very long. That being said, here is what some of the market’s leading commentators are saying.
Some commentators see similarities between recent events and the recession of 1990-1991 with the Federal Reserve’s action pushing the yield curve into its “normal” upward slope. They note however that the Federal Reserve’s intervention has been more aggressive in 2008. These commentators note that the first stage of recession is hardest but, that once the downturn is official, opportunities to leverage beaten-up stock prices will abound—frequently in those market categories that spearheaded the downturn. The problem is that there are no clear indicators that let us know when a recession has hit bottom. The sense that the worst is over comes gradually as various data is received and analyzed and evidence for a rebound accumulates. Perhaps the best way to try to anticipate this is to watch key economic data month by month to spot any indications of a gradual upturn. As always, seek the advice of your investment and tax professionals before changing your investment strategy.
Longer, More Severe Downturn?
Access to credit is vital to the viability of the U.S. financial system and the overall economy. Undoubtedly, and not without cause, the forced sale of Bear Stearns Co. shocked many economists. Some see this debacle, coupled with the persistent turmoil in the markets, as proof positive that the recession will get worse before it gets better. Central to this concern is the fact that Bear Sterns, the nation’s fifth largest investment bank, had a market value of $3.5 billion that dropped to about $240 million within a two-day period in March. The Fed’s emergency response—involving a $30 billion line-of-credit and recourse to Depression-era provisions in order to make loans to investment banks—was a further clarion call illustrating the severe stresses in the credit and financial systems. If confidence in the nation’s large financial institutions wavers, and investors –large and small—are living in anticipation of another unimaginable default, the damage won’t be over for a long time. Although the pessimists feel that the worst case scenario (a long, severe recession) won’t come to pass, most believe the odds of a worst-than-expected recession have significantly increased.
On a more positive note, the speed with which Congress moved to pass the upcoming economic stimulus package is viewed as a positive indicator. Analysts hope that further aggressive action by policy makers and by Capitol Hill will provide consumers with a boost of confidence, and will provide the catalyst needed to help the financial markets find their feet.