While we don't base our investment discipline on making short-term calls about the direction of the economy, we do pay close attention to what is taking place with economic data, and we continue to note an absence of data which would indicate that a current recession has begun or even is imminent.
As we stated in blog posts in November (you can see those here and here), we believe the recession drumbeat which was growing towards the end of 2007 (and reached a crescendo about a week and a half ago) was overdone.
For a while, it was hard to find anyone who wasn't stating confidently on the media that we were already in a recession. However, the kind of data that would indicate a recession remains absent, and people may be beginning to change their minds as to whether a recession is as much of a foregone conclusion as they thought.
One reason the markets stampeded lower as the recession talk grew louder is that so many money managers are "sector rotators" -- they will rapidly shift money from one sector to another depending on cyclical trends in the economy. When they perceive a recession seems likely these types of managers will rapidly move out of sectors that tend to perform well when the economy is expanding and shift assets into defensive sectors that they believe will perform even if the economy is contracting.
These shifts from sector to sector happen extremely rapidly and with large amounts of money. Like a herd of wild horses which at the least sign of danger will run first and ask questions later, money managers, in the aggregate, don't wait for a recession to actually be confirmed before they shift their allocations.
However, while recent data has been mixed, signs indicate that a recession continues to be unlikely. One notable data point from last week was the very low inventory levels reported in the Q42007 GDP number last Wednesday, which argues that businesses are not going to be caught off-guard with overly-optimistic inventories, a factor which has been present in previous recessions and does not seem to be present right now (we pointed this out in our December 31 post as well).
Other supply-side indicators such as durable goods orders and the ISM manufacturing index have been strong, while demand-side indicators such as the jobless numbers have been bad, but we believe the demand-side indicators are usually overplayed by the media and economists with a demand-side bias, and point out that Labor Department jobless numbers are very volatile and often subject to positive revisions (for a discussion of demand-side versus supply-side views of the world, see this previous post).
In short, it is important to be aware that the much-hyped recession has so far failed to materialize, and indications are that economic growth will continue, although always at a faster or slower pace from one quarter to the next. The most important point to be made is that these constant economic ebbs and flows should not shake you from hitching your own future growth to the ownership of well-run businesses that you can continue to own for many years.
For future posts dealing with this same issue, see also:
- "It's a panic, not a Great Depression"01/21/2009.
- "Managing Investments in the New Era" 02/18/2009.
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