Twenty months ago, corporate earnings growth was smokin' hot, job growth was hitting new highs, bankers were kings, and real-estate flipping was a popular sport. Yet stocks and the economy were on the verge of a historic crash.
Today corporate earnings and chain-store sales are actually contracting for the first time in 50 years, unemployment is soaring toward 60-year highs, bankers are public enemies and the only home flipping going on is of the one-finger-salute variety. And yet, despite all this gloom, stocks and the economy may be on the verge of a historic recovery.
It's weird, it's unexpected, and it may not last. But boy, if it's the real thing, you sure won't want to miss it as a policymaker, entrepreneur or homeowner. And for investors, these are the sorts of moments that can produce those fabled 10-baggers you may have heard about in days of yore.
I've got two famous but down-on-their-luck techs now selling for less than a buck that just might work out as epic 10x plays, but first let me explain why a rebound can appear out of the blue in much the same way that the recent plunge appeared out of the gray.
Separated at worth
The key thing to keep in mind is that stocks and the economy really have very little to do with each other. I know that sounds crazy, and counterintuitive, but it's true. Bear markets for stocks and recessions for the economy tend to overlap, which make them linked in the minds of the public and media, but they are asynchronous, which means they start and end on different timetables. Economists have competed with each other for decades to devise a formula that shows the secret yoke between the two, but to no avail.The only economics group that has ever come close to consistent predictive power in my opinion is the Economic Cycle Research Institute. This group, founded by pioneering economist Geoffrey Moore (he taught Statistics 101 to Alan Greenspan at NYU) publishes a Weekly Leading Index that synthesizes a short list of barometers into a single measure that has an eerie capacity to peer around corners at what's coming next -- a welcome contrast to most economic models, which linearly project the recent past into the near future. Back in 2007, when the consensus was calling for a soft landing for the economy, ECRI economists were screaming from the rooftops that a deep, dangerous recession lay ahead due, in part, to interest-rate and oil-price shocks.
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After bottoming in December last year, the Weekly Leading Index has moved ever higher as the impact of unprecedented fiscal stimuli around the world, ultralow interest rates, cheap energy and cheap raw materials has begun to course through the veins of industry like repeated shots of adrenaline. The pace of the rise in the WLI is also quickening: The average week-over-week increase was just 0.4% through the end of March. For the first week of April, the index jumped 1.2%.
While the WLI remains in negative territory, it appears the economy has started the long, arduous climb out of recession. This is happening faster than I expected, which is great. But even if it's an accurate signal, it may not look that way for some time. And just because the economy may be stealthily emerging from recession, the stock market does not actually have to follow.
An example: The last recession started amid the tech bear market in March 2001 and ended in November of that year. Stocks rose steadily from October 2001 to March 2002 as the recession ended, and many thought that the bear market was over. But prices then proceeded to plunge another 30% into October 2002. Whoops.
In short, while it's valuable to study the economy for signs of market recovery, it takes a lot more than reduced inventories and higher housing starts to conclude a bear market. You need a combination of strengthening demand for stocks and contracting supply, as increasingly intense buyers find they must tear equities out of reluctant sellers' hands by offering higher prices. That's starting to happen now, even if it's not quite at a tipping point like March 2003.
If stocks can falter even as an economy improves, the opposite can also happen: Stocks can rise even as the economy stumbles. Why? It's a function of the funky way that demand for goods and services works backward from the consumer to the manufacturer.
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A recovery ahead?Rob Morgan of Clermont Wealth Strategies and Robert Brusca of Fact and Opinion Economics discuss whether consumers pose a risk to economic recovery.
A tsunami of cash
Retailers, auto dealers, homebuilders and restaurants -- all organizations that directly face folks with money to spend -- are called "front-end" companies. Right now, their sales and optimism are rising off very low levels after deteriorating since 2006. After a long period of drought, their inventories are low. So they get on the phone and call "back-end" companies, such as chemical makers, shippers and wholesalers, and tell them to start making more product, pronto. Right now these companies say business is lousy, but ECRI's work suggests that a turn is coming.It makes sense that improvement would occur because over the last 20 months almost 575 policy initiatives have been announced around the world, by ISI Group's count, including tax cuts, spending increases, mortgage modifications, interest rate cuts, quantitative easing, capital injections, mark-to-market modifications, bank rescues, auto aid, currency swaps, deposit guarantees, aid for life insurers, the G-20 package of $1.1 trillion for emerging markets, and the alphabet soup of Treasury and Federal Reserve programs like TARP, TALF and PPIP. It's a staggering list ranging from sledgehammers to the kitchen sink, and the inventive folks in government undoubtedly have even more tricks up their sleeves.
Continued: Stocks that could catch fire
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