There’s supposed to be some good, some bad and some ugly.
Yet lately it seems we’ve only been getting the bad and ugly as recession fears, credit turmoil and other woes batter stocks and erode confidence.
In truth, things probably aren’t as bad as many people perceive, even in the financial and economic realm. Here are some favorable trends and developments to keep in mind:
– For most banks, it’s business as usual.
The banking trend has clearly deteriorated, but the industry began this slump from a healthy base. Banks that shied away from risky loans aren’t getting hit as hard. Many firms continue to lend as before. Earnings are down sharply, but most banks remain profitable.
Three banks failed last year and two so far in 2008, both in Missouri. The Federal Deposit Insurance Corp. listed 76 problem institutions at the end of 2007, but that’s out of more than 8,500 reporting institutions. The assets held by problem banks account for under 0.2 percent of industry totals.
– Few signs point to a deep recession.
It’s hard for optimists to deny a recession is at hand, but it won’t necessarily be severe.
The index of leading economic indicators has dropped for five straight months, but the changes have been mild. The economy has lost an estimated 85,000 payroll jobs, but that’s well below the 2.7 million shed around the last recession. Consumer spending and Gross Domestic Product might be down this quarter, but most economists don’t see big changes.
More to the point, recessions are a normal part of the cycle. We’ve had 10 since the end of World War II. They materialize once every six years or so and last about 10 months on average. They’re not fun, but they come and go. There’s little reason to think the current slump will be different.
– Earnings are holding up.
So how much have corporate profits plunged lately? Actually, earnings per share finished the fourth and most recent quarter up a median 9.6 percent, said Zacks Investment Research. While that’s the weakest report since the last recession, it’s far from a disaster. Zacks expects 7 percent median profit gains this quarter, which wouldn’t be too shabby in a soft economy.
Perhaps the key point is things aren’t so depressed outside banking and securities.
“The bad news has been very concentrated in the financial sector,” notes Zacks researcher Dirk Van Dijk.
Earnings will be under pressure for at least a quarter or two, but you can’t say they’re evaporating across the board.
– Stimulus pressures should become more apparent.
Uncle Sam will start sending out those special tax-rebate checks in little more than a month, and that should nudge consumer spending and even public sentiment higher.
The last time the government launched a program like this, during the recession of 2001, spending picked up.
“The rebates provided a substantial stimulus to the national economy,” according to a Northwestern University study, noting the recession ended that November.
The upcoming rebate program is four times larger than the earlier effort.
And don’t forget about the six Federal Reserve interest-rate cuts over the past half year. They don’t work immediately but should help provide a tailwind over the rest of this year.
– The worst could be over for the stock market.
While nobody knows if the market has finally found its footing, prices do move ahead of economic news. So even if we have entered a recession, stocks will start recovering before the slump ends.
Since peaking last fall, the Standard & Poor’s 500 had lost 20 percent as of its March lows. That compares with a median drop of 21 percent over the prior 10 recessions, reports Jay Penney, a Scottsdale, Ariz., certified financial planner.
He notes price/earnings ratios are currently much lower than at the start of most prior recession downdrafts. Valuations are “by no means excessive when looked at in broader historical context,” he argues.
Stocks already have been priced as if a recession is at hand, which means most of the damage could be behind us.
