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business newsThe Macro Economy and the Stock Market: Analysis and Review
By
James Kostohryz
Mar 10, 2010 10:10 am
A summary of where we are now, and a look back at predictions since early 2009.
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Three Phases of Economic and Stock Market Recovery
Since early 2009, my analysis of the domestic US macroeconomic recovery can be divided into three phases.
Phase 1: An initial strong recovery from the second quarter to the fourth quarter of 2009 driven by normalization of credit conditions and subsiding business and consumer panic.
First, major disruptions in working capital and trade finance depressed final sales to a level that was below actual demand. Second, businesses and individuals froze purchasing decisions due to panic. For both of these reasons, as financial market conditions normalized and general panic subsided, I predicted that pent up demand would be released (see Op-Ed: Surprises Continue to Drive the Rally) causing a sharp increase in sequential growth.
This scenario played out almost exactly as I had predicted. And this turn in macroeconomic momentum, combined with absurdly low valuations (see Your S&P Roadmap), was the basis for the strong stock market gains that I predicted starting in early March of 2009.
Phase 2: Strong economic growth based primarily on inventory rebuilding between mid 2009 and early 2010.
Due to the disturbances in the credit markets and the concomitant cash crunch in late 2008 and early 2009, I pointed out that companies had drawn down inventories to unsustainably low levels. I predicted that once credit market conditions normalized, massive inventory restocking would drive stronger-than-expected GDP growth. Furthermore, on the basis of my prediction of strong inventory growth, I also predicted faster-than-expected improvements in employment (see What Does Employment Mean For the Market?) as workers were hired to fill orders to replenish inventories.
Reviewing my various writings between July and August of 2009, I was clear in positing the strong possibility of a sharp upturn in GDP and an improvement in labor markets based on inventory rebuilding. However, I did worry about the sustainability of inventory rebuilding in the absence of growth in consumer demand. It wasn’t until September of 2009 that I became unequivocal about the likelihood of an endogenous recovery.
Notwithstanding the prescience of my relatively upbeat macroeconomic forecasts, my stock market predictions as of late July and August of 2009 proved to be far too cautious. My error was in believing that the market would probably look past the growth driven by inventory rebuilding and focus on instead on challenges related to the future sustainability of the economic recovery. Specifically, I thought that the market would adopt a skeptical “wait and see” attitude regarding the prospects of sustaining a new economic recovery based on consumption led growth. My prediction of market caution in the face of such uncertainties proved to be incorrect.
No positions in stocks mentioned.
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