So The Recession Is Really Over?

At least that is what the Cambridge, Massachusetts based National Bureau of Economic Research, the official recession-dating committee, recently had to say. In late September the organization indicated that they concluded that the recession was officially over in June 2009. Yes, you are reading correct, over a year ago at this point in time. It was the LPL Financial Current Conditions Index that prompted the announcement. The index is a weekly measure of the conditions that support the outlook for the markets and the economy and the trend was indicating a move from contraction to growth. So over a year beyond that June date there are certainly many Americans who would beg to differ with that conclusion. Particularly with unemployment remaining in mid nine percent ranges and GDP showing strains to produce some anemic growth.

Now admittedly, stock market performance for the recent quarter ended September 30, 2010 might give the indication that all is good again. The quarter ended with all the major equity indexes up for that period with the Dow +10.45, the Nasdaq +12.28, and the S&P 500 +10.73. Truth be told, it was really quite a ride during that time. July turned up from June, only to give it virtually all back in August, and then to witness what has to be described as the most unexpected upward move for September. Here was a month that history has clearly demonstrated to historically be the worst performing month in the market for the calendar year and what happened? It turns out to have the best performance in the month of September in over the last 70 years!

So let's be clear that the market going up is good, but is it sustainable? In the background of this recent momentum is a combination of bearish indicators that deserve attention. They are represented by a continuation of low trading volume, poor breadth of the market, and weakening financial stocks. In addition, there are two events that the market will be watching. The first is whether the Federal Reserve will follow through on their edict from the last meeting to embark on another round of quantitative easing to support the economy. The second will be the mid term elections in early November.

The objective behind additional quantitative easing is for the Federal Reserve to purchase more Treasury bonds with the hope of stimulating the economy by reducing long term interest rates further. It is becoming quite apparent, however, that there is a lack of agreement among Federal Reserve regional presidents whether the strategy will work. Some of those dissenters are currently not among the voting members of the board and for analysts who closely monitor the activity of the Federal Reserve the impression is that Chairman Bernanke can muster the number of votes that he would need to follow through with that plan. The downside to this, is if implementation does take place, suggests the Fed has a real concern about the ability of the economy to get back on track.

Then there are the mid term elections which seem to promise that change is on the way in both the House of Representatives and the Senate. Political handicappers are beginning to use phrases such as Republican "tidal wave" and "landslide." There appears to be a good probability that Republicans may be able to recapture the House of Representatives with the magic number to win needed at 39 seats. The Senate may be a bit more difficult with 10 seats needed, particularly since within the party they are trying to figure out how to deal with the unexpected win in Delaware by the Tea Party candidate Christine O'Donnell. Party support will depend on whether it is believed that she has a legitimate chance on the Republican ballot to beat the Democratic candidate.

What looks to be the case is that the election will alter the landscape in Washington and the government will most likely face a period of gridlock for the next two years. This will come about since even if the Republicans gain an edge in the House and even possibly win the Senate, President Obama will have his veto power to use. As for that gridlock, it could be good for the markets knowing that little will be accomplished. The road map for taxes, however, remains an open item and at this point nothing gets decided until the lame duck session resumes after the elections. The odds probably improve by that time to compromise on an extension for all taxpayers for at least another year.

So we currently have a disconnect between the stock market and the economy and it will be interesting to see how this plays out. While fears of a double dip recession seem to have subsided, it does appear that the country is faced with the prospects of low economic growth, at least for the near term, which will continue to put a strain on the unemployment ranks. For those people it will be of little consequence to know that the recession is officially over!