Recession In Sight?

The Index of Leading Economic Indicators came out today at its lowest level in more than two years, suggesting that the economy remains weak and recession is not out of the question. The housing slump continues to hurt employment and consumer spending. Credit is still very tight. Recession may not be inevitable, but we are still getting a reminder of what it looks like.

What will a recession mean to the stock market? History tells us that the markets can be weak in a strong economy and strong in a weak economy. This is because the stock market does not reflect the present; it discounts the future. Investors buy now based on what they expect will happen later. These expectations can be wrong, of course. Nevertheless, it is often the case that stocks begin rising when people conclude that the end is in sight. Moreover, "the market" is not monolithic. Some companies can perform well even in a recession, while others will not. This means that as the economy bottoms out, certain sectors will rotate into favor while others will lose their momentum. What keeps things interesting is that the cycle repeats itself a little differently each time.

Currently the economy appears to be in the early stages of recession, but a substantial number of investors still think there may be a "soft landing." Opinions change daily as more data comes in, which is why we are seeing substantial short-term volatility. This may be amplified for the rest of the month by seasonally low trading volume. The first week of January will give us a much better sense of what 2008 holds in store.

Due to the Christmas holiday, we will have only one update next week, on Thursday December 27th.