A double-dip downturn? Wait and see

By Jim Jubak

Now we wait.

We wait to see if all those $600 checks sent out as one part of Washington's stimulus package can get the economy revving again.

We wait to see if seven interest-rate cuts from the Federal Reserve -- the last one a quarter-point cut to 2% on Wednesday -- have ended the crisis in the financial markets and stopped it from taking down the U.S. economy.

We wait to see if stocks can keep going up when the Fed takes away the punch bowl of rate cuts.

Get ready for a long wait, unfortunately.

Some clarity by September

Oh, sure, we'll know pretty soon if the current stock market move is a real rally or just another head fake. We're pushing up against the 1,400-to-1,425 range that has turned the Standard & Poor's 500 Index ($INX) back five times this year. I think we'll get an answer on this one within weeks.

And we'll know by September exactly how powerful those $600 tax-rebate checks were. If retail sales rebound to show year-to-year gains in July, August and September -- the classic months for "back to school" shopping -- we'll know the medicine was strong enough to revive the patient.

If retail sales continue their abysmal performance of the past year -- as of March 31, retail sales were up just 0.1% in 12 months -- we'll know that tumbling home prices, rising prices for gas and food, and falling employment have overpowered this round of stimuli.

But we won't know until sometime in 2009 whether any economic growth we see in the next few months as a result of Washington's largesse is an honest-to-goodness recovery or a bounce that will turn into the thud of a double-dip slowdown.

So how does an investor navigate this impossible morass? In stages.

Keeping an open mind

So let me try to take my own advice and break down, one by one, the problems investors face.

Faithful readers -- and if you're not, shame on you -- know I don't think investors can trust the rally from the March 10 closing low on the S&P 500 at 1,273 (see my April 25 column, "Don't trust this market rally"). But I'm trying to keep an open mind so I don't get stubbornly locked into either a bull or bear position.

After all, I've got Jubak's Picks 40% in cash. That's a high percentage of cash for the Picks and a position I think is prudent. If, as I believe, we're going to see a correction in the next few weeks back toward, and perhaps through, the March 10 low, then it's OK to wait. If we have a rally instead, I might miss a hundred points while I'm waiting, but that potentially lost opportunity is the cost of gaining greater certainty about the market's direction.

I'm trying to keep a similarly open mind about the possibility that a $108 billion rain of checks can turn around the economy, but I'm extremely dubious. Given high gas and grocery prices, I suspect that most of the $108 billion will be spent pretty quickly despite everything everybody is saying about savings and debt reduction.

In a similar 2003 stimulus package, about two-thirds of the cash was spent in six months, most of it on what economists call consumer nondurables -- what you and I know as food, gasoline, laundry detergent, clothes and the like.

Money flowing back to retailing?

Economists are their usual divided selves about how big a bump such spending might give the economy. The survey of economists by the Philadelphia Federal Reserve showed a median projection of a 0.3-percentage-point boost to growth in 2008 and a 0.1-point boost in 2009. But that median conceals a huge difference of opinion, from no boost to a 1.5-point addition to growth in 2008.

Perhaps to the surprise of those readers who think of me as Mr. Gloom and Doom, I actually incline toward the higher of those figures. (To the degree I can follow the rather arcane argument about economic models that seems to have broken out among economists over how to calculate the stimulus in the stimulus package, the folks who predict a larger effect appear to be on stronger ground.) Most of the stimulus money will be spent extremely quickly, and we're likely to see a pretty good bounce in retail sales numbers as a result.

Continued: Markets anticipating stimulus effect

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