Today’s update on new orders for durable goods reminds that the slash-and-burn of the Great Recession is over, replaced by the tedious business of rebuilding what’s been lost.
Once again, the news is encouraging, if only because the deep pain of the recent past fades as an imminent threat. And so the crowd can look with somewhat less-anxious eyes to the 1.0% rise in new durable goods orders and find a measure of comfort. As our chart below shows, the orders are rising off the bottom that formed in the first half of this year. But as anyone can also see, the work of rebuilding what’s been lost has only just begun and climbing this hill will take time, in part because the recovery is susceptible to the usual hazards that loom in every post-crash period. True for durable goods, and for many other measures of economic activity.
But let’s revel in the good news, if only for a minute. That includes recognizing that orders rose at a healthy clip even after subtracting the standard noisemakers: transportation and defense. That tells us that the advance was broad based. And so it was, save for a few minor holdouts.
At the same time, it may be dawning on the crowd that the recovery, while looking intact for the moment, is set to be increasingly boring. The excitement of the past six months or so is on track for the dull business of looking forward, finding challenges and formulating responses. That’s quite different from weighing the data du jour, looking backward and cheering that we’ve sidestepped a larger disaster.
The future, to put it bluntly, looks rather tedious from our perch. Rebuilding and reviving the economy from here on out will take real work that doesn’t lend itself to big headlines and late-night meetings on Wall Street and in Washington’s halls of power. We’re no longer in imminent danger of collapse but we’re not poised for robust growth either. Changing this future will only come with time. There are no new TARPs waiting in the wings to spirit us back to the good old days. The government has pulled all the rabbits out of its hat, and with some progress to show for it. But there are no more obvious strings to pull to jump-start recovery beyond the soothing elixir of time and letting economic nature take its course. The angel of darkness is no longer hovering, but salvation isn’t yet at hand, at least not salvation worthy of the name that’s likely to satisfy the crowd’s hunger for quick results.
The main impediment to a deeper, richer rebound remains the labor market, which continues to retreat. October’s nonfarm payrolls report isn’t due for more than a week, but the consensus forecast warns of another dip of 175,000. That’s light by the standards of earlier this year, but a long way from supporting the hope that’s embedded in the rising price of risk these last several months.
Better days are coming, but the gains will be incremental, occasionally retreating and ceaselessly shadowed by doubts, innuendo and plenty of volatility and surprises—good and bad. In short, the economy’s going to give investors a run for their money, but not necessarily in the way we’ve come to expect these past 12 months or so. Big, dramatic swings with monster-size catalysts are a thing of the past. Patience is in; bold decisions with quick results (up or down) are fading. Subtle challenges and precious nuance await. It was all or nothing early in 2009. No longer. We’re headed for an era of a thousand risks, each one subtle but lacking the power of life and death.
The implication for strategic-minded investors is that managing asset allocation will get tougher. A year ago you had one or two decisions that were of the make-or-break variety. That was an anomaly. We’re sailing back to seas with finer shades of gray. Some of that—perhaps a lot of that is related to the nuance that awaits in the business cycle.
The bottom line: opportunities will retreat for beating an expansive definition of the market portfolio, as defined and analyzed on the pages of The Beta Investment Report. You’ll have to work harder, be smarter, all things equal, compared with the past year or so. All of which is likely to stoke the marketing machines advising otherwise. Beware the risk that comes dressed as the seer promising the moon.