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Market's Wheels Are Slowing Down, Again

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As markets face an almost certain economic growth slowdown similar to 2002, or the high probability of a double dip, expect bargains in equities during the next few months.

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Editor's Note: This article was written by Robert Barone, head of Ancora West. Mr. Barone currently serves on AAA's Finance and Investment Committee which oversees $5 billion of investible assets.


The bond market knows it. The equity markets now appear to have an inkling, but haven't quite digested all the facts.

I'm talking about the almost certain economic growth slowdown or the high and rising probability of a double dip (the economy falling back into recession).

The last time we had a growth slowdown was in the fourth quarter of 2002. The recovery was somewhat perky in early 2002, but by the fourth quarter, Real GDP growth was essentially nonexistent (+0.08). Technically, the economy didn't double dip. In the post-9/11 economy, the equity markets, as measured by the Dow Jones Industrial Average (DJIA), peaked at 10,635.25 on March 19, 2002, the same quarter as the peak in the economic growth rate. The DJIA then fell a total of 31.5% to 7,286.27 (October 19, 2002), reaching its trough in the same quarter as the trough in economic growth. Using quarter-end data, Table 1 shows that the DJIA fell 11.2% in the first quarter of slowing growth, and another 17.9% in the next quarter.

Table 1: Economic Growth and Market Performance


The current situation has similar characteristics, at least so far. Fourth-quarter 2009 GDP grew at a 5.4% rate, but growth slowed in the first quarter of 2010 to 2.7% and, given the data presented in this paper, is likely to have slowed further in the second quarter. And the market has followed a similar pattern, peaking early in the second quarter at 11,205.03, and standing, as of June 29, after one quarter of slower growth, some 11.9% lower. Note in the table that in the first quarter of growth recession in 2002, the market fell 11.2%, and as growth continued to recede, losses mounted. If current growth continues to slow or actually turn negative, then, using the 2002 experience, the market would fall to somewhere around 7,675. While I can't say for sure where the market is going, I do know from the data presented below that this economy appears to be significantly weaker than the economy was in 2002.

Table 2 is a comparison of selected economic indicators in today's economy and that of the fourth quarter of 2002, during the height of that era's growth recession. As can be seen from the table, except for manufacturing (a relatively small part of today's US economy), all other indicators are significantly weaker.

Table 2: Comparison of Current Situation to 2002 Growth Recession



Let's begin with housing. There's no doubt that it's tanking again after the expiration of the first time homebuyers' tax credit. It appears that the government's cash giveaway programs only serve to pull demand forward. This was evident in Cash for Clunkers, and it certainly appears to be the case in housing.
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No positions in stocks mentioned.
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