The economy is terrible. Be ready for a bounce in stocks.
That's the word from Encima Global's David Malpass, who says the stock market is worse now than in 1980, but the rebound could be sharp—and happen relatively soon—just like the one back then.
He calls the economy like this:
We're in a sharp recession, the real deal, as sudden as the second quarter of 1980 when GDP fell 7.8% (followed by a 0.7% decline in the third quarter of 1980).
We expect a sharp recession brought on by the high mortgage rates, the dollar collapse in the first half of 2008, the commodity spike into July, and the equity collapse at Lehman, AIG, Fannie/Freddie and more broadly. These problems have expanded into jobless claims, consumer credit, and retail sales. We expect sharp new weakness in non-financial corporate earnings as the recession deepens.
Bad news right? Well yes. But stocks don't look at what's happening right now. They look down the road, past recessions. That happened in 1980, and Malpass says it could happen again in 2009.
He points out:
- The S&P hit an interim low of 99 on March 26, 1980, down from 108 in September 1976, and down massively in inflation-adjusted terms. (The CPI peaked at 14.7% year-over year in March 1980, eroding equity values.)
- From 99 in March 1980, the S&P then rose to 140 by November 1980 as investors looked past the recession and selling panic.
- As the 1980 recession unfolded, Fed Chairman Paul Volcker cut interest rates to 11.5% in April (from 20% in March.) Inflation stayed high, so rates rose back to 20% in December 1980 and May 1981, contributing to an even deeper recession than the first half of 1980. In both recessions, equities bottomed in the middle of the recession and enjoyed sharp gains.
- Equities have been hit harder in this recession than in 1980, though from a higher level in terms of the PE multiple. We expect a sharp recession but a relatively quick recovery in the first half of 2009, allowing strong equity gains once the recovery comes into sight.[EndBlock]
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