Are The Markets Right About The Recession?

Wall Street has had a run up of almost 40% over the last three months. The reason is slightly weird. The market cheered news that was less bad than expected. Die hard believers in the efficiency of the stock market insist that the recession ended sometime this spring. They claim that markets typically look forward at least nine months and they predict the economy will start recovering by the end of the year.

The pessimists are not convinced. They say that although the panic that set in after Lehman Brothers collapsed seems to have subsided the economy is still in decline. A lower rate of decline does not equal a recovery they say. Unemployment rates are rising and that will cap any stock market rally as more people have less money to spend. In any case the stock market has been wrong in the past as there are several instances of bear market rallies even during the Great Depression. They warn of another dip in economic activity before a slow recovery sets in, a classic example of a 'W' shaped recovery. A temporary improvement in economic activity, as businesses rebuild inventory dumped onto the markets at a discount after the credit markets froze,should not be confused with a recovery.

Nevertheless it is hard to ignore the signs of stabilization emerging around us. The Leading Indicators Index which considers consumer goods orders, building permits and several other data points rose in May by 1.2%, the second increase in as many months. The housing market also appears to be improving,by at least as far as the number of houses sold is concerned although not by prices. Cheaper homes are finally attracting buyers and people are beginning to have greater confidence about future incomes. Figures due to be released shortly are expected to show that both existing homes sales as well as fresh homes sales posted a healthy increase in May, helped by low mortgage rates and Obama's $8000 first time home buyer tax credit. The 'cash for clunkers' scheme will pump in additional billions of dollars into the ailing auto sector.

Typically recessions end before people realize they have ended. The economy is expected to start recovering by the last quarter of this year if not earlier. The experts may have got it right this time after all.