Double-Dip Recession Fears Putting Scare Back in Market

A slew of troubling market factors have collided to send investors looking for safety amid concerns that the economy may slip back into a deeper recession.


Fears of a double-dip have lingered throughout the recoverybut have intensified recently as the economy shows little signs of robust improvement and Wall Street has witnessed a sharp trend higher in bond investing.

In remarks released Wednesday, the Federal Reserve underscored misgivings about the recovery, saying employment is showing only gradual improvement, the housing market is languishing and consumer spending is increasing only modestly.

Investors have taken notice, pushing Treasury yields lowerand expressing more reservations about a stock market that keeps repelling from trendlines that refuse to give ground.

"The pattern of the market seems to be variations of, 'I've fallen and I can't get up,'" says Walter Zimmerman, senior technical analyst at United-ICAP in New York. "The market's taken a big hit. We're not optimistic. We think we'll be fortunate if the double-dip is the worst that lies ahead."

Few if any economists these days are forecasting a strong economy by historical standards. Estimates for gains in gross domestic product through the end of the year generally reside in the 2 percent to 4 percent range.

But some analysts see things even worse, and comparisons to the economy of 1930 are getting increasingly common.

Zimmerman said the stock market drops and ralliesare much like those after the 1929 crash, and the economy was showing many of the same tendencies during both time periods, with diminishing commodity and rail car loadings figures signaling the impending full-fledged Depression much like prices are trending currently.

"We would eagerly like to see divergence from the parallels to 1930. So far there are no signs of divergence," he said.

To be sure, the double-dip theory has its share of skeptics, and some analysts say investors should be treating market dips as buying opportunities.

Employment, while still weak, is showing signs of stabilizing as evidenced by improvement in Thursday's weekly jobless claims report, and interest rates are at historic lows in an effort to entice home buyers.

But Gluskin Sheff economist David Rosenberg also took up the 1930 theme in his daily analysis Thursday. He, too, noted the crash in 1929 was followed by the rally in 1930, followed by asset deflation, credit collapse, a natural disaster, geopolitical disagreements and threats, low interest rates, high gold pricesand several other common characteristics.

The two analysts differ somewhat on how dire things could get for the stock market—Zimmerman is far more bearish—but both see troubling signs in the surging bond demand.

"At current yield levels (1.9% on the 5-year?), the Treasury market is screaming deflation," Rosenberg wrote. "If it is right, not only is the consensus estimate of a new peak in corporate earnings in danger, but so is the key 1,040 technical threshold on the S&P 500."

The yield on the benchmark 10-year note has slipped below 3.10 percent and is trending towards levels not seen since the March 2009 stock market lows.

Even as the government continues to pile up debt and deficits and supply keeps raining on the debt markets, investors are unwilling to walk away from the safety bid.

"That shows two things: People are concerned about safety and there's no demand for credit," Zimmerman says. "It's demand for credit that drives the 10-year rate higher and it's demand for safety that drives it lower. Evidently the world doesn't like what it's looking at."

There are any number of drivers influencing the double-dip camp, but the two most prominent seem to be worries over the housing recoveryand fears over European debt that won't go away, even as the news cycle has tilted away from the sovereign issues.

Double-dip assertions come from "a long convoluted trail of argument, and the convoluted trail starts in Europe," says Peter J. Tanous, president and director of Lynx Investment Advisory in Washington, D.C. "Even assuming the austerity measures can be implemented, those austerity measures portend a period of slow growth or no growth in Europe. That's the type of stuff that crosses the Atlantic."

On housing, noted bank analyst Meredith Whitney told CNBC earlier this week that the market is certain for a double-dip, though she stopped short of calling for one in the broader economy.

And fellow banking analyst Dick Bove has issued a report saying that financial regulation reforms are likely to send the economy back into recession—and he also joined the chorus comparing the current situation to the 1930s, though he moved a little later in the decade when the Depression had its own second leg down.

Regulators in 1937 increased reserve requirements for banks—much like Congress is proposing now—and that steepened the economic downturn, Bove said. A similar phenomenon happened in the early 1980s, when then-Fed Chairman Paul Volcker ramped up the fed funds rate to 20 percent, he said.

Bove said he worries that political pressure will constrict money supply and cause a repeat of both mistakes.

"To me this is a repeat of 1937 and 1981," Bove said. "The hyper focus on interest rates is misplaced. If money supply continues to decline it matters little what interest rates are. It is very difficult to imagine an economy avoiding recession if the policy makers keep taking actions which reduce this vital part of the economy....Therefore, it is quite possible that voting for this banking bill and the associated regulations is voting for recession."

Economist Peter Cardillo, of Avalon Partners, in New York, is not in the double-dip camp, but he acknowledges that slowdowns in housing and worries over Euro-zone debt have caused him to cut his GDP estimates about half a percentage point, to 2.75 percent to 3 percent.

"I don't think we're headed for a double-dip but I do think we're headed for slow growth," he said. "Worries about the possibility of housing experiencing a double-dip are gaining traction."

Tanous says investors can protect themselves in the difficult environment by buying top-quality dividend-paying stocks.

Zimmerman, though, says investors need to prepare for worst-case scenarios.

"We could at least see a retest of the March 2009 lows," he says. "Until we see a divergence from the patterns of 1929, we have to be alert for patterns much worse than that."