Single-day rallies of 900 points or more in the Dow Jones Industrials tend to get our attention, in part because they’re the unicorn of market action: Often imagined but never seen. Well, we saw a unicorn yesterday.
In fact, we’ve seen a lot of things lately that just a few months ago were the stuff of dreams–or nightmares. No wonder, then, that this reporter is at risk of losing perspective amid all the chaos. But let’s try to sober up and reassess where we’re at in the economic cycle. Maybe, just maybe, we can cut through the extreme volatility and venture a guess as to what’s coming. It’s a long shot, but let’s go through the motions anyway.
We begin by speculating that all the government’s efforts at stabilizing the financial industry don’t really change the underlying economic conditions that brought us to this point. The government’s intervention was about stopping the bleeding and shoring up the system to avoid implosion. Perhaps it’s time to label that effort successful, although no one quite knows just yet. As for the real economy, the question mark is much bigger. Indeed, the financial crisis over the past year has only recently been making a mark on Main Street, and it’s our guess that the trend has quite a few more months to run, at the least.
We’re talking here of real estate bubbles and the associated fallout. It didn’t start overnight, nor will it end suddenly. No, we still can’t see the future any better today than yesterday or last year. Regardless, we’re not convinced that the cycle gods are done playing with mortals.
We could cite any number of economic numbers to support our still-cautious outlook, but we’ll start by looking at our proprietary measure of economic activity–CS Economic Index. As our chart below shows, momentum still looks biased to the downside, as it has been for some time. This is hardly news. Your editor has been pointing this out for some time now, along with many others observers of the economic scene. For quite a while, we were premature in calling for a material weakening of the general economy, as in this post from last March. So it goes in forecasting generally: you’re either early or late. A few lucky souls enjoy perfect timing, of course, but repeat performances by the same people are rare, and rest assured that yours truly isn’t likely to ever join that celebrated club.
As for the economy, the above chart strongly suggests that there’s more weakness coming. Economic weakness tends to beget more of the same. Until it stops. Even then, recovery may be preceded by lengthy stretches of treading water. Distinguishing one from the other is as much art as science, of course, and on that note it’s every forecaster for himself.