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Client Communication Briefing After learning of the revised
economic reports last week, I felt an update to be in order. It seems the stock market’s decline in July
did point to a weaker economy than the current data suggested. After a reported six percent growth in GDP
for the first quarter of 2002, expectations were pretty high for a strong
economic recovery from the recession that began in the third quarter of 2001.
Unfortunately, it would appear
that it isn’t only corporate This news hit an already jittery
stock market and we saw stocks sell off on Thursday, Friday and this week
Monday. U.S. Bonds again were the
beneficiary of the stock sell off with the two-year notes yielding less than
two percent – the lowest rates ever.
Ten year bond yields dropped below 4 ½% pointing to another round of
mortgage refinancing as the 15 year fixed rate is now under 5 ¾%. Priced into these yields is the expectation
that the Federal Reserve will lower rates within the next two months to
restore growth in the economy. The
faulty economic data kept the Fed from taking more decisive action earlier –
hopefully they will make up for lost time soon. I thought the panic selling that
was hitting stocks last month was primarily driven by the lack of confidence
in corporate governance and reporting.
However, compounding those concerns was a much slower economy that the
Government stats were not clearly identifying. A better measure of economic
expansions and recessions is the National Bureau of Economic Research (NBER)
Recession Dating Procedure. This
measure identifies the turning points and lengths of recession and expansion
in the economy using current employment, industrial production, and
manufacturing and wholesale-retail sales and real personal income statistics
instead of the Government’s Gross National Product. The report covers the economy going back to
1854. Under this procedure, the
economy slid into a recession March of 2001 and while we had an improvement
in some of the measures since then, it is too soon to call a beginning of a
sustainable expansion. The average
length of recessions under the NBER’s definition going
back to 1854 is 18 months. Since 1945
the average is 11 months. The longest
recession was 65 months in 1879 through 1882 followed by 43 months in
1933-1937. We had the two longest
recessions since 1945 of 16 months each starting in 1975 and 1991. So where are we economically
now? Unfortunately, no one knows for
sure. The stats are showing where we
were rather than where we are now and where we are going. NBER does not declare a change for at least
a couple of quarters after the event actually happens. The last call was in November 2001 for the
turn that happened the previous March.
The only real comfort we have is that recessions have an average life
of around one year and we are overdue for a recovery. This uncertainty is feeding into the
already negative attitudes of investors and will continue to depress the
stock market over the short run.
Expect continued stock price volatility. I am afraid we will be testing the lows of
July again before this is over. My intent with these Client
Communication Briefings is to keep you apprised of the latest news and
information impacting the financial markets along with my opinions and
assessments. While we cannot change
the outcome, I believe it is valuable to maintain realistic expectations as we
weather through these trying times. Sincerely, Michael P. Haubrich,
CFP Sources: Website for the NBER Business
Cycle Expansions and Contractions http://www.nber.org/cycles.html |