Friday, September 23, 2011

The Recession is Coming, The Recession is Coming

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

No comments:

Post a Comment