Fears of a double-dip recession have been swirling since the recovery began back in 2009. Economists, advisors, and investors have predicted, forecasted, rationalized and, in some cases, even hoped that a double-dip was imminent. The reality is they have been wrong. The economy actually thrived over the past two years, producing record levels of aggregate GDP at about $15 trillion, record levels of personal income at $13 trillion, and record low interest rates and inflation, along with high levels of productivity. The stock market produced double-digit returns in both 2009 and 2010. Even as the worst quarter for stock market performance since Q4 2008 nears a close, the market is still up from where it was a year ago.
Admittedly, unemployment has remained stubbornly high, and housing has yet to recover. While GDP hit record levels, the pace of growth has been below historic average growth rates. As a result, the last two years have felt less like an expansion than the statistics would support.
Looking back, to have flinched at the headlines about a weak economy at any point along the way (and believe me, there were compelling reasons to flinch) would have been a mistake. Market timing is challenging at best, and one wrong move can erase the profits of the last ten good moves. The portfolio management team and I have navigated away from market timing in our philosophy, always focusing on long-term verifiable economic trends. To that end, the data is suggesting that the next recession is here. Although it appears a recession is upon us, there’s no reason to panic.
As we sit here today, with the portfolio down on the year (albeit less than major market averages have suffered) we anticipate becoming more defensive, with possible inverse/negative exposure in the future. We believe this repositioning should reduce the overall risk and volatility of the portfolio further.
Based on the current economic climate, it appears the decline will be much more typical of garden-variety recessions/contractions, characterized by a slowing economy and declining financial markets, but within ranges that do not destroy investor wealth beyond levels that should be recouped during the next expansion. I compare it to a gloomy April day in Chicago with the temperatures at 41 degrees and a mix of rain and snow. It’s either a bad spring day or a mild winter day for Chicago. This contraction/recession could resemble that kind of day: either a slow growth period or a mild contraction.
The global economy is awash with liquidity, corporate balances sheets are healthy, and worker productivity is high. When expansion resumes and demand resurfaces (by that we mean real, sustainable demand) the labor market will be ready and willing to get back to work at fair wages. Then, the economy is going to light up like you would not believe. We cannot say what will spark demand, but the ingredients are there, and will create an expansion that will surprise even the most optimistic economist on the upside. It’s coming at some point. Unfortunately, it’s not going to happen in early 2012. Outside headwinds still exist that currently do not support necessary growth rates. When it does arrive though, we will identify it and ride it for all it is worth.
Analysis and research are provided for informational purposes only, not for trading or investing purposes. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information. There is no assurance that the Astor’s investment programs or funds will produce profitable returns, you may lose money. 900001-69
Friday, September 23, 2011
Tuesday, September 13, 2011
When Zero Is Zero
After cruising along at a slow, but steady pace for two years, the economy seemed to stall around mid-year 2011. Q2 2011 GDP, which originally had been estimated at + 1.3%, was ratcheted back in a second estimate to a rise of 1.0%. While growth is growth, its anemic nature made one wonder if the patient would rally or sink into a relapse. The start of Q3 2011 brought with it a number that is impossible to ignore: the big goose egg, an empty basket—zero.
The Employment Situation Report released on the first Friday of September showed that no jobs– none, nada—were added in August, and the unemployment rate remained at 9.1%. The 17,000 jobs that were added were completely offset by the loss of 17,000 government jobs. Even the Bureau of Labor Statistics sounded a little disheartened when it stated, “the [unemployment] rate has shown little change since April.”
Zero job growth signals that the odds for a contraction are significantly higher than any time since the recovery began. In fact, my finger is on the trigger. At Astor, we responded to the latest data by adjusting our portfolio to protect against the possibility of a shock to the economy. We have not become maximum defensive, yet, but we did reduce equity exposure even further, and also added some non-correlating defensive positions. It’s possible that we could become more defensive and even establish an inverse position in the third quarter, but only time will tell.
As of this writing, the data are indicating GDP growth for the year of around 1%. While hardly robust, it is far better than the -6.3% economic contraction experienced in Q4 2008 and job losses of 500,000 per month. Given how far we’ve come up from the bottom, flat is okay. Not great—but okay.
The markets are taking a breather as stock returns and the economic growth of the past few years are not sustainable. Even if we stay right here for the year, the three-year economic performance will look pretty good in the rearview mirror, especially when we consider how tough the road was in 2008.
Despite some investor fears to the contrary, this is not 2008 all over again. I’ve said it before, but it bears repeating: in 2008 we had a recession on top of a financial crisis. This time around, if the economy does slip from low growth into recession it will be a garden-variety contraction.
Meanwhile, the government keeps trying to jumpstart the economic engine by focusing on jobs. Against the backdrop of an unemployment rate that persists over 9% (and with an election year approaching) President Obama unveiled a $447 billion job-creation program, which includes tax cuts and a spending plan. After the job program was announced last week, economists were all over the map with their assessments.
As for this economist, I expect job growth to be more in line with demand. Even with government assistance, businesses will not hire meaningful numbers of new workers unless demand for their goods and services pick up.
I have never been a market timer, and I don’t intend to start now. I much prefer to analyze the economic data and identify the prevailing trend, which history has shown to be a far better investment strategy than guessing which way the wind will blow next. As for now, the numbers spell out a weakening economy and a greater chance of a recession occurring. After all, it’s hard to argue with a zero in the employment report. But we need to remember we have come a long way baby, even if it doesn’t feel like it. So if we do pause or even contract from here it’s not a bad place to rest.
The Employment Situation Report released on the first Friday of September showed that no jobs– none, nada—were added in August, and the unemployment rate remained at 9.1%. The 17,000 jobs that were added were completely offset by the loss of 17,000 government jobs. Even the Bureau of Labor Statistics sounded a little disheartened when it stated, “the [unemployment] rate has shown little change since April.”
Zero job growth signals that the odds for a contraction are significantly higher than any time since the recovery began. In fact, my finger is on the trigger. At Astor, we responded to the latest data by adjusting our portfolio to protect against the possibility of a shock to the economy. We have not become maximum defensive, yet, but we did reduce equity exposure even further, and also added some non-correlating defensive positions. It’s possible that we could become more defensive and even establish an inverse position in the third quarter, but only time will tell.
As of this writing, the data are indicating GDP growth for the year of around 1%. While hardly robust, it is far better than the -6.3% economic contraction experienced in Q4 2008 and job losses of 500,000 per month. Given how far we’ve come up from the bottom, flat is okay. Not great—but okay.
The markets are taking a breather as stock returns and the economic growth of the past few years are not sustainable. Even if we stay right here for the year, the three-year economic performance will look pretty good in the rearview mirror, especially when we consider how tough the road was in 2008.
Despite some investor fears to the contrary, this is not 2008 all over again. I’ve said it before, but it bears repeating: in 2008 we had a recession on top of a financial crisis. This time around, if the economy does slip from low growth into recession it will be a garden-variety contraction.
Meanwhile, the government keeps trying to jumpstart the economic engine by focusing on jobs. Against the backdrop of an unemployment rate that persists over 9% (and with an election year approaching) President Obama unveiled a $447 billion job-creation program, which includes tax cuts and a spending plan. After the job program was announced last week, economists were all over the map with their assessments.
As for this economist, I expect job growth to be more in line with demand. Even with government assistance, businesses will not hire meaningful numbers of new workers unless demand for their goods and services pick up.
I have never been a market timer, and I don’t intend to start now. I much prefer to analyze the economic data and identify the prevailing trend, which history has shown to be a far better investment strategy than guessing which way the wind will blow next. As for now, the numbers spell out a weakening economy and a greater chance of a recession occurring. After all, it’s hard to argue with a zero in the employment report. But we need to remember we have come a long way baby, even if it doesn’t feel like it. So if we do pause or even contract from here it’s not a bad place to rest.
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