Economy Safe From Recession? Investors Think So

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More good news: The Dow Jones industrials are extending their record gains of late and also approaching the 13,000 level. So not only do consumers seem to be ignoring all the doom-and-gloom predictions about the economy–mostly from housing bears warning of a spillover to other sectors–but the same goes for investors. (Of course, the consumer and the investor often are the same character.)

As it happens, I just got off the phone with Andrew Stenwall, a top bond manager at Nuveen Investments in Chicago. Keep in mind that treasury bond guys often crave bad economic news since it means less risk of inflation. But Stenwall is looking for the economy to re-accelerate as housing becomes less and less a drag on the economy. No recession call from him. (Also note that the recession odds in the online betting markets have dropped sharply.)

And it doesn't surprise Stenwall that consumers have held up so well despite the housing downturn, since his firm's studies show that new-home sales and housing prices don't have much of an effect on consumer spending–certainly not as much as jobs, personal income, and the wealth effect from the stock market. And all look good right now.

For investors looking beyond housing data, there has been some positive tax news. Fears of massive rate hikes from the new Democrat-controlled Congress and a potential Democratic president in 2009 may be ebbing a bit. (Remember, the stock market is a forward-looking, discounting mechanism.)

Greg Valliere, political analyst to Wall Street at the Stanford Group, now thinks that while the top marginal tax rate of 35 percent is headed back to 40 percent after the 2008 election, not so for capital gains and dividend taxes rate: "These tax rates are popular. There's virtually no chance they will be raised anytime soon."

(Keep in mind that such analysis must assume a populist John Edwards presidency doesn't happen. He wants income and investment to be taxed at the same rate.)