Wall Street put on a classic nail-biter performance last night, soaring at the outset over China’s move to free up its currency, only to plummet as fears over European debt resurfaced, before reaching unsatisfying denouement at the close.
But while we’ve now come to expect hugely volatile trading sessions where strong reversals can happen in a matter of hours, some analysts argue that these wild gyrations are pointing to the huge uncertainty clouding our economic future.
John Hussman of Hussman Funds says that the US economy is in a real “cliff-hanger” situation. In fact, if this were an action novel, we’d be at the point where our hero – the US economy – was hanging over a steep precipice, clutching onto a rock of uncertain strength. We readers would be hoping that things would turn out well for our hero, but we’d be fearing the worst.
As Hussman notes, “it’s possible that things will resolve sufficiently well, but we have to consider the possibility that they will not”.
Hussman says the latest reading from the Economic Cycle Research Institute (ECRI) reinforces this uncertainty.
The ECRI weekly leading index – which points to where the economy is heading – fell last week to a -5.7% annual growth rate. The decline in the ECRI index is worrying, because it suggests the economy is rolling over. But, at the same time, it’s too early to start predicting a recession, because the decline in the index hasn’t lasted long enough.
Hussman also believes that the US sharemarket market is at a crucial inflection point, now that it has rebounded from its recent oversold condition.
He sees two possible outcomes. The first, relatively benign development is that “a further recovery in market action would most likely create modest further demand from already well-invested speculators and trend followers, and modest offsetting supply from already defensive value-oriented investors, allowing a dull but moderate continuation of upside progress.”
But there’s another, more worrying possibility – “a deterioration in market action would likely trigger a substantial amount of liquidation by speculators, into a market where fundamentally-oriented investors would require large price adjustments in order to absorb it. “
But David Rosenberg, chief economist at Gluskin Sheff, is more confident in predicting how the story is going to end.
He argues that there’s only been one previous occasion when a fall in the ECRI to -5.7% failed to signal a recession. And that was back in 1987, when the US Federal Reserve was still in a position where it could cut interest rates to stimulate economic activity.
What’s more, Rosenberg notes that “a -5.7% print accurately signalled a recession in the lead-up to all of the past seven downturns”.
In any case, Rosenberg points out that the steep drop in the ECRI is likely to mean that US economic growth will be much slower than most economists are forecasting in the second half of this year.
At present, the consensus forecast is for 3% real GDP growth in the second half of the year. But Rosenberg notes that whenever the ECRI dips to between -5 and -10, the average growth rate in the next six months is 0.8%.
Rosenberg points out that in early 2002, the consensus forecast was for 3% growth in the second half of the year, and instead economic growth came in close to zero.
“So right now the choice is really either a 2002-style growth relapse or an outright double-dip recession – pick your poison. “
He adds the uncomfortable reminder that back in 2002, disappointment over economic growth undermined the US sharemarket.
“If memory serves us correctly, the S&P500 went on to do the inexplicable and make new lows before the year was out.”
This article first appeared on Business Spectator.
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