Wednesday, September 16, 2009

The Recession Is Over!

Everyone can breathe a deep sigh of relief – yesterday, Federal Reserve Chairman Ben Bernanke, in response to a question after a speech he gave, stated that the recession is “very likely over.” That’s great news, right? Not necessarily. First of all, although he’s the nation’s leading monetary authority, Mr. Bernanke is not part of the body that officially declares the beginning and end of recessions. That responsibility belongs to the National Bureau of Economic Research’s Business Cycle Dating Committee. The NBER is a private, nonprofit organization (of which Mr. Bernanke was once a member, but no longer). Second, he warned that the recovery is likely to be lackluster, mostly because the employment situation remains very challenging. And third, if you wanted to be really cynical about it, then perhaps you wouldn’t feel too confident about the predictive abilities of the Federal Reserve, since they certainly didn’t provide meaningful warnings prior to the historic financial crisis that we’re currently attempting to recover from. But we won’t go there.

The problem with the whole recession dating process for investors is that it tends to be very lagging, meaning that the stock market has probably already moved in a big way by the time you find out if a recession has either started or ended. It makes for great headlines, but that’s about it. Instead, we try to focus on various leading indicators and other measures that might give more advance notice of important turns in the cycle, many of which we’ve written about here. We’ve seen a growing number of those improve over the past couple of months, implying that the recession probably did in fact end sometime over the summer. Stocks have certainly anticipated that, since the S&P 500 has rallied an impressive 55% since the low on March 9th. Our focus now is on trying to respect the very powerful rally we’re enjoying, while also being careful not to get caught up in the euphoria that’s sure to build as the market climbs higher and more and more people pile on to the “recession is over” bandwagon.