Doubting the Double-Dip

|
 |  Includes: DIA, QQQ, SPY
by: Sean Hannon

We live in a never-ending news cycle. With hundreds of television stations supplemented by traditional media outlets and the ever expanding internet content, nearly every topic is dissected from countless perspectives. After all, with programming hours to fill and advertisers to satisfy, the pundits need something to discuss.

One topic which recently has attracted increasing attention is the talk about a double dip recession. Google Trends shows searches for the term “double dip” nearly seven times higher than when the stock market peaked in late April and over six times higher than the beginning of the year. With recent economic data indicating weakness a growing crowd declares a double-dip recession inevitable.

But is it? First, we should start with a definition. A double-dip recession occurs when gross domestic product (GDP) slides into negative territory after a few quarters of growth. In more general terms, we see a recession followed by a short-lived recovery which leads to another recession.

Based on this definition, a double-dip seems likely. Following the credit crisis, unprecedented levels of monetary and fiscal stimulus were applied. Consumers received tax credits for everything from cars to appliances and the Federal Reserve (Fed) drove interest rates down. This led to a spike in consumption which goosed GDP higher. However, the growth spurt was short-lived. Government intervention failed to trigger sustainable economic growth and job creation. As that stimulus now fades, joblessness remains elevated and the economy seems likely to relapse.

However, before deciding a double-dip is a certainty, we should examine the past. According to the National Bureau of Economic Research (NBER), there have been 33 recessions since 1854. Over this 156 year period, there have been three double-dip recessions—1913, 1920, and 1981.

This is a remarkable history. During this 156 year period, the United States experienced a Civil War, two World Wars, the Great Depression, skyrocketing inflation, and over seven massive bear markets. However, a double-dip recession materialized only three times.

Never an advocate of looking backward to predict the future, I am not saying that a fall into a new recession is impossible. However, it is unlikely. The past is not necessarily prologue, but is an excellent teacher. More money has been lost on Wall Street by believing that this time is different. Those believing in the inevitability of a double-dip recession are joining this crowd.

Although I believe the odds of a double-dip recession are low, that does not mean stocks are headed higher. Over the years ahead, I expect a low growth economy, limited job creation, and erosion in our standard of living. The stock market will respond by swinging from gains one day to losses the next while making little overall progress. Within this massive trading range, active investors who seek value, manage their risk, and quickly realize profits will greatly outperform a static buy-and-hold strategy.