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TO SUMMARIZE OUR THOUGHTS 6/30/2010 The recession most likely ended last summer, but the fact that the end still hasn’t officially been declared by the NBER is evidence of how tenuous the economy remains. In spite of rebounds in various economic indicators, this recovery, like the previous two, has been less robust relative to the contraction.In addition, the growth and stability that has been seen has thus far relied on short-term inventory restocking or government programs that are now completed or being wound down. We must now see if private demand can pick up and if the recovery is self sustaining. We are still far below output levels that existed before the crisis, and whenever you have a subdued recovery, the chatter about a double dip recession increases. However, it is natural for growth to slow after an initial 12 to 15 month increase. Despite waning confidence, there are indications an uneven, subdued recovery will continue. A double dip recession is exceptionally rare and has only occurred once since the depression – in the 1980s. Today, interest rates are extremely low and inflation is not an issue. Both are expected to remain the same for a long time. At the same time, a steep yield curve does not indicate recession and stock valuations are still below typical levels during environments of 2-3% inflation. The European crisis is a reminder of how interrelated the world is today. In turn, market volatility increased in an instant. However, throughout history spikes in volatility have coincided with market lows. Challenges persist, especially over the long-term. However, they are well defined. Future equity returns will be subdued and volatility less subdued, but unless government policies interfere to the point where they smother out the fire, the economy will at least smolder. |
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