It seems like only yesterday that the market, along with the press, was throwing out all kinds of consonants to describe our inevitable descent into a deeper recession, all the while whining for a second stimulus package. Well, actually, it was about three weeks ago. Close enough. Today, we got extremely strong numbers from the housing sector and the press is officially declaring an end to the recession. So goes the schizophrenia of Wall Street in our just-in-time, immediate data driven, blogosphere-based economy. You recall we pointed out that there are many conflicting cross-currents at any economic inflection point—well, here you go.
So are we really emerging from the recession abyss? The short answer is yes. But what about those generationally high unemployment numbers--do they mean nothing? The short answer is yes. Does all this mean that the market should be going up? The short answer is yes. We don’t intend to be flippant about such important questions, especially when it comes to the human toll of high unemployment, but a full discussion of their nuances is well beyond the scope and purpose of our weekly missives. Unemployment aside, there has been substantial evidence that the economy is indeed turning to the better. From leading economic indicators to company reports and guidance, the arrows point to an upward bias to economic growth. The question now being bandied about is over what the pace of the recovery will be (remember that just three weeks ago there was to be no recovery)—will we get a “V” or an “L?” They we go with those consonants again…
The fashion term being overused in this economic cycle is “new normal.” The bears argue that the “deleveraging” of US corporations and households will dampen demand for years to come, resulting in a “new normal” (lower) level of GDP growth. Others, more politically inclined, posit that the Obama Administration’s spending plans, anti-business bias and rapid u-turns in policies are causing uncertainty that stifles new investment by business (we tend to be somewhat in this camp). The bulls, by contrast, argue that fiscal policy is irrelevant and that the accommodative monetary policy of the Federal Reserve will be all that is needed to engender significant GDP growth. As bottom-up, fundamentalists, we look at all this from a seldom mentioned point of view. Stitching together the earnings reports we have observed so far, we note that US corporations, having cut early and deeply, are more lean than they have been in years. There is a reason that technology is outperforming this year--investment in technology increases productivity, allowing companies to be more profitable with fewer workers. So when companies “beat the street” on the bottom line with lower than expected top line they are telling us something very important: that when demand does improve—and it will—the new earnings leverage in corporate
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