Market participants tend to talk about the stock market as “always” bottoming before the economy. Such bullish arguments presently forecast the economic bottom to trough this fall and therefore argue that March 2009 was “the” stock market bottom this cycle, neatly 6 months in advance of the economy. This theory may prove correct in the end. Only the clarity of retrospect will tell us for sure a few years down the road.
But a risk now is that the “rule of thumb” about markets bottoming before the economy may not hold true this time. The most recent exception was the last downturn where the economic trough was November 2001 (now clearly defined in retrospect) and yet the stock market did not make a lasting bottom until February 2003 (15 months later). Part of the reason for this lag of the market bottom after the economy last time, was that the jobless, anaemic economic recovery disappointed those conditioned to expect a vigorous “V”. Far from a robust bounce, in 2001-2004 we saw a timid, tepid start. It took a few years before over-juiced credit finally ignited mass speculation and the appearance of stronger growth.
The probability of a sluggish recovery this time is surely higher than after the tech wreck in 2000. This time we have a multi-asset, multi-country, financial crisis wreck. This time the savings rate is coming back in earnest as a shell-shocked consumer comprehends the importance of a savings buffer rather than just access to a line of credit.
This time people already have too much credit, they don't want more. This time the masses already own multiple-real estate or too much house, they wish to downsize not lever into more. This time the economic recovery is more likely to be slow and plodding, blurred in the outset by durable unemployment and wiser, more modest consumers.
There is a risk that those that have been piling back into the stock market the past couple of months, may not be prepared for the long, hard, slog back to economic health. I suspect this is a marathon, not a sprint. Reducing over-capacity, building up savings and equity are the foundations of our future sustainable growth, but none of this is as easy as throwing more credit around.
These will be healthy developments in the longer term—they make me longer-term more optimistic–, but in the next year or two, masses weaned on quick growth and easy money may not be mentally prepared for this course. Regular income more than capital gains may be the “trick’ for a while.
This recent Bloomberg interview with Roubini makes some valuable points on what the “new normal” growth may look like over the coming recovery.
Cory’s Chart Corner
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