With a summer rally underway in the equity markets and glimmers of good news coming out of Corporate America, the pendulum is getting ready to swing. Just as we suffered from the reversal of irrational exuberance and the speculative excesses in the financial and real estate markets, we are poised for a positive upswing that may surprise some people.
I've been saying for quite some time this recession is likely going to be longer than most of us are prepared for, but I'm beginning to feel like I'm following the herd. Conventional wisdom at this point suggests that we will technically come out of the recession in Q3 and certainly by Q4. It is also believed that growth will be modest and primarily driven by inventory restocking rather than consumer spending as unemployment continues to rise and people continue to save where they can. As a result, the expectations for a noticeable rebound are relatively low and 2010 is not expected to produce big upside surprises...this is the conventional wisdom.
Having said this, the acceleration of the global recession on the downside suggests we may see acceleration on the upside as the economies around the world recover together. This momentum may create a "V-shaped recovery" which was talked about and then discounted by most over the last few months. But the market move from 660 on the S&P to 1,000 during this same timeframe suggests that investors have become increasingly worried about missing the upside rally. As a result, Goldman's prediction of the Dow rising to 10,000 by year end appears highly probable, and the pessimism of the day may give way to optimism early next year.
The holiday season could be the next big moment. While expectations will be low given the current pessimism, the potential for surprises on the upside is there. If inventory levels are once again diminished and the consumer proves to be more resilient than is currently expected, the momentum will shift and an impressive rebound in 2010 may take place. As a result, don't be surprised if the equity markets hold onto the gains from this year and rise another 20% next year. We would also see unemployment start to come down and the long, drawn out period of stagnation to give way to much improved and growing economies around the world.
So, get ready for the pendulum to swing and watch the Fed. Higher interest rates and inflation are just around the corner if the optimistic scenario plays out. This will require just as much expertise by Bernanke to control inflation as he has demonstrated in shoring up the financial system.
What are your thoughts? Are we overly pessimistic or do you believe that our problems are so big that we'll have trouble recovering for years?
