A new economic index predicts that the current recession will end in September and be followed by a mild recovery – the latest in a series of upbeat reports that have helped prolong a strong run-up in U.S. stock prices.
This latest indicator – the USA Today/IHS Global Insight Economic Outlook Index – uses an array of 11 forward-looking financial and economic indicators to gauge inflation-adjusted gross domestic product (GDP) grow. Seven of the 11 were positive in May, USA Today reported yesterday (Thursday).
The conclusion, according to IHS Global Insight (NYSE: IHS) Chief Economist Nariman Behravesh: “We’re two or three months away from an upturn.”
According to an analysis of the indicators, three important things are happening right now:
- The interest-rate yield curve is steepening, which is often an indicator of future economic growth.
- Orders for so-called “big-ticket” items – expensive equipment used to build machinery, roads or buildings – are still well below their year-ago levels, but have been increasing of late.
- Stocks are in a bull market – which can be very promising, since share prices tend to advance six months to a year ahead of an economic upturn. Share prices have zoomed 30% in three months.
Standard & Poor’s Inc. Chief Economist David Wyss agreed with the assessment that the economic decline will probably end in the months to come, but says substantial uncertainty remains.
“We see a bottom in the fall, but there’s a lot of risk attached to that," Wyss told USA Today.
U.S. Federal Reserve Chairman Ben S. Bernanke recently talked about the economy’s “green shoots” – early indications of growth. But he’s also talked about a “jobless recovery” – a rebound in which growth returns, but companies don’t resume hiring. In an economy where the unemployment rate is 9.4% – the highest point since 1983 – and still growing, the prospects of an economic resurgence without any new jobs is problematic to say the least.
The Fed’s "Beige Book" report, released Wednesday, looks at the country’s regional economies and says the overall U.S. market remained weak in April in May, even with signs that the downturn may be easing.
Such continued signs of weakness continue to stoke concerns among consumers.
Other bullish indicators have surfaced.
This Dow’s No Dog
The 13-week rally the Dow Jones Industrial Average has experienced off its March lows is the most powerful surge that index has seen since the Great Depression. If we look to history, stocks should continue to rally over the next three months, Hugh Johnson, chairman of Johnson Illington Advisors, told MarketWatch.com last week.
According to Johnson’s research, the 13-week stretch from March 9 through May 29, which saw the Dow soar 28.3%, has been bested only once - by the 40.8% run-up the Dow enjoyed in the 13 weeks that followed its hitting a bottom in May 1932. The Dow surged an additional 3.1% last week.
Going back to 1900 - in any given quarter (13 weeks) - there have been only 18 cases in which the market surged 20% or more, Johnson said.
Looking at the trends, the odds are strong that the Dow will be higher three weeks from now, and that means the odds are strong that the index will be higher three months from now, Johnson says.
“I say this with the utmost confidence and my fingers tightly crossed: This is the start of a new bull run,” Johnson said. “Based on history, who knows where we’re going to be four weeks from now? But in 12 weeks, the odds are we’ll be 3.8% higher.”
That can’t be guaranteed, however, since there has been at least case where stocks had a huge quarter, only to plunge afterward: In May 1929, the Dow zoomed 26% in 13 weeks – and then nose-dived 38.9% in the 12 weeks that followed.
For investors who feel the Dow is too narrow an index to really measure investor sentiment, another investment research group has pinned its research to the Standard & Poor’s 500 Index, which gained 30% from its March 9 low.
On Monday, Bespoke Investment Group LLC looked at six prior rallies since 1928 in which the S&P 500 gained 30% or more in a three-month-period.
“While some have called the current rally a once-in-a-lifetime event, the reality is that the S&P 500 advanced by nearly 31% following the Russian debt default and the collapse of Long-Term Capital Management,” Bespoke wrote in its research note. “Compared to what has occurred over the last two years, that whole period seems quaint now.”
In the seven rallies of 30% in three months studied, the S&P had posted additional gains two thirds of the time both three months later and six months later. But the returns weren’t huge – the average additional return in the subsequent three months was 3.36%, and in the subsequent six months was only 1.92%. Compare that with the average return for the S&P 500 for any six-month period since 1928: 3.3%.
Standard & Poor’s Wyss says a major remaining wild card is the European banking system, which is wrestling with loan losses in Eastern Europe. Couple that with the ongoing corporate credit worries and the continued consumer caution and there are definitely some reasons for any rebound in the U.S. economy to be tepid, at best.
Concedes IHS’s Behravesh: “We’re not out of the woods, yet.”
This article has been reposted from Money Morning. You can view the article on Money Morning's investment news website here.