Summer Sizzle or Fizzle?

MONTHLY MARKETPOINT

Summer 2010
Summer Sizzle or Fizzle?
by David Andrews, CFA, Director, Investment Management & Research, Richardson GMP Ltd.

The Bigger Picture

Many of you may be fortunate enough to be reading these musings while enjoying some well deserved R&R at your favourite summer retreat. It is therefore quite possible your thoughts of ā€˜double-dipsā€™ these days refer more to ice cream than they do to the state of the global economy. Investors have spent the past several weeks obsessing over the continuing global macro problems but have recently added increasingly weaker economic data to the growing list of things to worry about. Will the precarious (and potentially contagious) financial problems in Europe cascade into global credit crisis, part deux? Will China be able to cool off its heated economy and effectively navigate a so called ā€˜soft-landingā€™? What should investors make of the leading economic indicators (Industrial Production and Purchasing Managers Index) that have clearly peaked? Perhaps the big question of the day is whether the global economy is likely to sizzle in the second half of 2010 or possibly fizzle out and spiral into the dreaded double-dip recession? One thing is certain: unlike the outside temperatures which have been heating up this summer, the markets have been in cooling mode since the beginning of May. Our forecast calls for neither sizzle nor fizzle this summer, but more likely something in between. We are anticipating a continued mix of both good (earnings, valuations) and bad (global macro, BP oil spill) news to keep markets range bound this season.

Will that Be One Scoop or Two?

Recessions are often more difficult to predict than the stock market itself. Notwithstanding, we make the argument that a double-dip recession seems a remote possibility if for no other reason than, statistically speaking, double-dips are rare events. There have been only two double-dips in the past 90 years with one occurring in 1920 and the most recent in 1980. In both cases, the first ā€˜dipā€™ was relatively mild but was then followed by a second more severe and longer lasting downturn. When we reflect back on the recent 2007-2009 recession, the term ā€˜mildā€™ does not immediately come to mind, so perhaps economies purged in one shot. Pessimists may argue that what we just endured was only the first ā€˜mildā€™ dip and the second is on its way and likely to be more catastrophic. We donā€™t subscribe to this negativity. We believe it is worth noting that in the 1920 and 1980 doubles, the more serious second dip was primarily due to misguided government trade barriers and monetary policy that became too restrictive. These actions effectively snuffed out the recovery in its early stages (In 1980, higher interest rates were needed to fight skyrocketing inflation levels. Today, the inflation situation is vastly different.). We therefore believe the biggest downside risk to the global economy (and investment markets) continues to be the potential for government policy error either in the form of too much austerity (heavy cuts to spending) or too little monetary stimulus (interest rates hiked too quickly).

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