With the benefit of 15 months of hindsight, we now know the Great Recession is officially over. When the National Bureau of Economic Research (NBER) declared the recession officially ended in June 2009, it reminded me of a constant annoyance. As the official arbiter of when recessions both begin and end, the NBER is given great latitude. Instead of deciding in real time, as all investors must, a group of economists make grand pronouncements about important events well after they have occurred. If only stock trading were that easy.
As easy as it is to mock the NBER’s timing, there is a more important consideration. History has taught us that recession leads to recovery. When the economy stops declining, it should begin growing. With this transition occurring, investors can make assessments of economic growth and the effect it will have on stock prices.
Currently, the transition is unclear. Bulls will seize on better than expected economic indicators that helped drive the S&P 500 above the upper-end of its trading range. I am less convinced. Having consistently warned against extrapolating short-term data into long-term trends, those who believe one month of data determines the future are destined for disappointment.
Returning to the NBER’s announcement, we are told the recession ended in June 2009. Since then, a variety of economic data has not agreed with this pronouncement. Looking at employment, from June 2009 until August 2010 844,000 jobs were lost. Housing remains dormant with new home sales dropping from 396,000 to 288,000. If this is economic growth, I would hate to see what contraction looks like. Simply, we are witnessing economic growth that is apparent only to economists and statisticians.
Believing a deep disconnection exists between the underlying economic data and the stock market’s performance, I do not expect the upcoming week of 9/27 to 10/1 to address the divide. Instead, the bulls will gallantly defend the ground they have earned, portfolio managers will run the clock toward quarter end, and attention will shift toward the upcoming earnings season. Combining these factors, the most logical outcome is one in which stocks remain range bound on light volume until key catalyst emerge. However, 2010 has taught us that logic rarely reigns. Therefore, those waiting for a few calm days must be prepared for the unexpected.