Bears in mind: Weakness renews concerns about stock market, recession
2011 has turned out far differently than what Doug May anticipated back in January. Forecasts for economic growth, albeit modest, have given way in the aftermath of extreme volatility in the financial markets to concerns about stock market declines and a return to recession.
“The economy is much, much, much slower than I expected,” says May, president and chief investment officer of May-Investments in Grand Junction.
Stock market volatility initially was blamed on an impasse over raising the U.S. debt ceiling and then an announcement from Standard & Poor the rating agency had downgraded U.S. debt, May says. The volatility more likely reflected mounting concerns over a debt crisis in Europe and slowing global economy, he says. “This is a Europe problem and maybe I’m saying now a global recession problem.”
A falling stock market and rising bond prices are typical of what happens during a recession. May says the risk of a further downturn in the stock market has prompted him to sell some of the investments he manages to increase the amount of cash available to reinvest in stocks at lower price levels.
May revised his forecasts for a mid-year economic update.
In January, May forecast annual growth of 3.5 percent in gross domestic product, the broad measure of all goods and services produced in the country. GDP actually grew at only 1.3 percent during the second quarter and slower still at just 0.4 percent during the first quarter.
While May expected the U.S. unemployment rate to slip to 8.5 percent, the jobless rate stood at 9.1 percent in July and could go up to 9.5 percent before the end of the year, he says.
Short-term interest rates will remain nearly nonexistent after the Federal Reserve Open Market Committee announced its intention to keep the benchmark federal funds rate at between 0 and 0.25 percent through mid-2013, he says.
While May initially expected the stock market to trend higher in 2011, the market instead has taken investors on a recent roller coaster ride of gut-wrenching drops and surges. During a four-day span earlier in August, the Dow Jones Industrial Average of 30 blue-chip stocks whipsawed more than 400 points each day. May says a measure of volatility in the market has at times doubled the reading for what’s considered a normal market.
The price of gold, considered a safe haven for investments in times of volatility, has climbed to record heights of nearly $1,800 an ounce — an increase May says could constitute a warning of a downturn ahead.
Other leading indicators of economic performance continue to signal growth ahead, although May says he’s become more skeptical of those readings.
The Conference Board Leading Economic Index rose three-tenths of a percent to 115.3 in June, a higher reading than prerecession levels in 2007, he says.
The May-Investments Leading Economic Index also continues to trend upward, May says, although a number of components of the index have retreated or are in flux, he says.
Global shipping activity, exports of U.S. manufactured goods and the sales of semiconductors used in electronics all have weakened, May says.
At the same time, other components of the May-Investments Leading Economic Index reflect strength, May says.
The count of drilling rigs operating in the United States, a measure of energy exploration, has climbed back to the peak levels of 2008. Lower oil prices could curb activity, though, May says.
Large corporations report record profit margins, May says. But profits could fall in a recession.
Banking lending has increased, although more stringent lending restrictions remain in place, May says.
Given the uncertainty, many of the components of the index are in flux, he says, including semiconductor sales, but also profit margins and banking lending as well as capacity utilization, money supply and retail sales.
While some financial analysts have characterized current conditions as a slowdown in the middle of a cycle of expansion, May has a different take. He expects downturns in the stock market and overall U.S. economy. “We’ve got a recession in front of us.”
Since the official beginnings and ends of recessions aren’t announced until well after the fact, the U.S. economy could already be in recession, May says.
If that’s the case, the question then becomes how long and deep of a recession lies ahead and how far the stock market will decline, May says. Typical bear markets involve declines of stock prices of nearly 40 percent.