Is the Recession Over?

Once again unemployment Friday released new information for me to review and, like the groundhog, try to make the prediction of how much more winter, I mean recession, we have left. As you know we at Astor focus rigorously on the employment numbers as we believe they speak volumes on the condition of the US economy at large as well as specific individual sectors.

It was this data that alerted us to be defensive as early as December 2007 and indicated that a slowdown was in the offering for 2008, and it will be this data that will signal the all-clear to be aggressive in high beta stocks. Of course there are those who will try to get ahead of the curve, forecast the recovery, and invest early, but it is unclear how they do this, and the more intriguing question is how they expect investors to forecast and time a possible expansion if they were not successful in getting out at any point during the recession. For my money, and that of our clients, we prefer to be highly confident that the recovery is underway and that a major decline is highly unlikely before we make our move. This has proven us well over the past nine years as we have been able to participate in most, if not all, of the upside with little fear of major losses, while also playing defense during major economic and market downturns. This approach has helped us avoid sharp losses twice this decade. So while the market might go up further from here, it is hard to be more then 50% certain it will go up as the current data doesn’t suggest anything more than that the economy is getting worse at a slower rate. Now if you want to read this as the beginning sign of an up-trend I am okay with that but history shows that the markets can decline significantly (10% or more) with economic statistics as they are currently, even if it is not as bad as it was a few months ago. This is not a condition where I would recommend aggressive positions. Although, there are some bright spots and we hold positions in sectors like technology, utilities and health care while we are defensive in major markets tied to the economic growth such as financials, energy and large cap.

So what are the numbers saying? Well, the economy is still losing jobs, hundreds of thousands per month at that. However, the payroll number was not as bad as expected and, believe it or not, the number was not boosted by government payrolls (which actually lost 7,000 jobs). Further good news was that the payroll numbers for last month and the month before were revised up (we didn’t lose as many jobs as we thought) and that is very encouraging.

However, job growth is only one part of the equation and output or economic growth (as measured by GDP) is the other. It still appears the economy will have contracted in the 2nd quarter. That will be four in a row and I have never seen that; so we are off the charts in looking for a bounce-back from negative growth.

Let’s add it all up. We are still losing jobs each month and each quarter, GDP is negative for the unprecedented fourth quarter in a row. The S&P, which has been down for six consecutive quarters, is finally going to have an up quarter, and that is the only real positive sign that is not just a better negative. But, remember, the S&P is still down year-over-year.

This all doesn’t add up to my definition of an expansion. It is a correction in a bear market where the odds are equal that the market can go up from here as down from here and I just don’t like those odds. During expansions and bull markets the odds greatly favor that the market will go up from current levels. The market becomes what I call positively sloped. I love expansions as it takes the guesswork out of investing. Just pick any day to buy and the odds greatly favor higher prices in the future. That is not what we have today. I am not saying that the markets can’t go up or that the end of the recession is not near, what I am saying is that once we can identify the expansion and bull market the risk/reward will be more compelling and the opportunities greater. When that will happen is anyone’s guess, as is whether the markets will be at higher levels than they are now once that occurs. Maybe or even probably yes they will, but really, who cares? It will be lower than when the recession and contraction began and there will be plenty of time and opportunity to make money during the next expansion, so why take on additional risk? The good news is that the entire market will not turn on a dime and that many sectors will turn before the entire economy. In fact, some have already entered a new bull market. This will give a portfolio like ours the ability to participate in the early stages of an expansion without the added risk and volatility of the uncertainty. When the economy started to contract and we became defensive it was late 2007/early 2008. There were many rallies and some economic indicators that looked to be improving but the reality was that the trend was down. While we didn’t know where the top of the market was, we did know that the odds favored lower prices in the future and we were comfortable being defensive at that time. And now, over a year and half later, it’s hard to remember where the price was at the exact start of the contraction. Most likely, a year and half after the next expansion it will be equally as hard to remember where exactly we got aggressive on the buy side, as it will most probably be from lower levels.

So follow the data and invest according to the direction of the economic trend that you can identify today and you won’t be disappointed.