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Fears Over Another 2008-Style Stock Market Collapse Are Completely Unfounded
By
Louis Basenese, Chief Investment Strategist
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The latest economic reports make it hard to ignore that the prospects of another recession, or at least an economic slowdown, keep increasing.
For instance, the latest ISM Manufacturing Report reading dipped below 50 for the first time in nearly three years.
As Bespoke Investment Group warns, "Based purely on the history of the ISM, the numbers suggest that there is a 58.6% chance that the U.S. economy is either in or on the verge (within six months) of a recession."
What's more troubling is the fact that the latest ISM reading is not an anomaly. Other economic readings keep checking in lower than expected, too.
Like the Federal Reserve Bank of Philadelphia's manufacturing index, which fell to minus 16.6 in June, the lowest level in almost a year. And the
Conference Board's Consumer Confidence Index, which fell for the fourth month in a row in June.
So, clearly, it appears the economy's weakening at a time when analysts previously expected growth to accelerate. That's hardly an ideal situation. But investors are completely overreacting to it.
They're immediately thinking in 2008 terms. That the economy's going to be gutted. And in the process, the stock market's going to collapse roughly 40% again.
Here's why those fears are completely unfounded...
This is Not 2008!
It's easy to look in the rearview mirror now and realize that the dreaded 2008 market collapse was precipitated by excess on the part of consumers, corporations
and the government. And the vehicle of choice to facilitate the runaway spending was, of course, the real estate market.
Fast forward to today, though, and we're dealing with a completely different set of conditions...
~Corporate Finances: Instead of being overburdened with debt, corporate balance sheets are now overburdened with too
much cash. The latest report from the Federal Reserve reveals nonfinancial companies ended 2011 with $1.7 trillion in the bank. That's close to an all-time high.
We're even seeing signs of improved health in the two sectors most responsible for the last stock market crash: Financials and Real Estate.
Since 2011, banks have been increasing dividend payments, with
The Bank of the Ozarks (NYSE: OZRK) being the most recent example, raising its dividend just this week. Such increases would not be possible if bank finances remained shoddy.
Likewise, many homebuilders are reporting better-than-expected sales, including
Lennar (NYSE: LEN) and
Hovnanian Enterprises (NYSE: HOV). Combined with the latest S&P/Case-Shiller Home Price Index readings, it's clear that the
real estate market finally hit bottom - and is improving, too.
~Consumer Finances: The average consumer's also deleveraging. Total U.S. household debt has fallen to 84% of GDP from a peak of 98%, based on a paper presented last August at the Federal Reserve's Jackson Hole conference. (A level above 85% impairs growth according to the study's co-authors.)
Granted, McKinsey believes U.S. households still have another two years worth of deleveraging left. But by no means is the average consumer as overleveraged and, therefore, vulnerable to an economic slowdown like they were in 2008.
~Total Domestic Debt: In the 11 quarters since the recession ended, total domestic debt only inched 1.7% higher. (As a percentage of GDP, total domestic debt has actually declined for 12 quarters in a row.) In comparison, in the 11 quarters preceding the last recession, total domestic debt ballooned 28%, or by $10.7 trillion.
Bottom line: America is in much better financial shape, relatively speaking, than it was before the last recession. So it's irresponsible to assume another recession or economic slowdown will be nearly as severe as the last.
In tomorrow's column, I'll share with you why stocks could actually rally in the face of a weakening economy. So stay tuned.
Ahead of the tape,
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Louis Basenese
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