The morning after: A huge drop on Wall Street prompts visions of the future and ambivalence about the present. The Monday announcement that the economy has now been in recession for a year encouraged some experts, who say the recession may be closer to an end, and discouraged others, who say the recession has already reached historic proportions and is likely to get much worse.
Licking their wounds after the Dow's fourth-worst daily point drop, fund managers and economists regroup.
Small Caps and Bad News
Sentinel Small Company Fund's Betsy Pecor acknowledged small-caps got hit especially hard on Monday, but insisted she's sticking with her process. Bob Brusca of Fact and Opinion Economics said the official announcement that the recession began a year ago does nothing to indicate we may be any closer to the end, and although he hopes for recovery by the middle of 2009, there's much more bad news to come. (Watch their full comments here)
Fed vs. Banks
Brian Battle of Performance Trust Capital Partners said the Federal Reserve and the banks have opposite objectives: The Fed insists it's necessary for the banks to make credit cheaper and more available, but the individual banks are trying to get rid of credit and pay down their debt. Battle said what needs to be done is to make the economy itself larger to support the debt.
Looking for a Silver Lining
James Paulsen, chief investment strategist of Wells Capital Management, pointed to the following bright spots: Home sales in California are up 100 percent off their lows, because of great values; gas is going for $1.60 a gallon; and Black Friday sales were much stronger than anticipated. He said we may be much closer to a bottom than feared. A year ago, he said, hearing that 250,000 jobs had been lost in the previous month would have triggered massive selling; if that number is what we see on Friday, it should cause massive buying.
Rising Sun, Economic Opportunity
Matthew McLennan of the five-star First Eagle Global Fund said Japanese industrial stocks have become much more attractive, after decades of deflation. He said times will be tough there, too, but Japanese companies have the resources to endure the rough weather, and the rough weather itself produces remarkable opportunities for the long-term investor.
How to Trade a Deepening Recession
The average investor needs a five- to seven-year time horizon, according to the Schonfeld Group's Steven Schonfeld, but if the investor wants to be a trader, he must shorten his holding time by 50 to 75 percent. Doug MacKay of Broadleaf Partners argued that it's that kind of thinking that "got us into this mess." His long-term time horizon is somewhat shorter than Schonfeld's; he recommended that investors go "all in" with anything that can be longer than two years. (See their full comments here)
No, Virginia, No Santa Claus Rally
History is a good starting point, but it's not gospel, the way S&P chief investment officer Sam Stovall sees it. Looking ahead to December, a traditional month for market gains, Stovall said the questions still to be answered include how deep, how widespread, and how long-lasting the recession is likely to be; have all the negative inputs been factored in; what about employment, which is expected to hit 6.4 percent this time around, but could go to 8 per cent or higher next year.
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