Is the Market Signaling a Double-Dip Recession?
Policy + Politics

Is the Market Signaling a Double-Dip Recession?


Remember February 1978? Jimmy Carter was president, Van Halen’s eponymous debut album was released, and early that month, a powerful blizzard swept across the northeastern United States, dumping a record 27 inches of snow on Boston and causing more than $500 million in damage (or some $1.8 billion in present value).

That same month was the last time that the Dow Jones Industrial Average posted nine straight losing sessions—a streak that Wall Street narrowly missed repeating on Wednesday. The Dow Jones index rallied late in the day to close up 29.82 points, or 0.25 percent, at 11,896.44. And one day after falling into the red for the year, the Standard & Poor’s 500-stock index broke its own seven-session losing streak, gaining 6.29 points or 0.5 percent to 1,260.34. The Nasdaq posted the strongest gains of the major indexes, adding 23.83 points, or 0.89 percent, to 2,693.07.

Still, those one-day gains hardly undid the damage left by the blizzard of bad economic data that has troubled investors in recent weeks—a storm of GDP numbers, manufacturing data, and consumer confidence readings that wiped away more than $1 trillion in market value worldwide in less than two weeks, according to Bloomberg News

The S&P 500 now stands some 8 percent below its April 29 high for the year. And skittish investors on Wednesday again drove the price of gold to a new high, the fifth in eight sessions. While stocks have skidded, gold has jumped more than 3 percent since July 25.

The slide might not have been as bad if lawmakers had cut short the debt-ceiling soap opera, now on hiatus until Congress returns next month, or if they had struck a bargain that addressed entitlement reform and tax reform. “But as it was, the deal was late and it was bad,” says Dr. David Kelly, chief market strategist for J.P. Morgan Funds. And investors who were hoping for a relief rally once a debt-ceiling deal was done have instead been greeted by fresh fears about a deepening debt crisis in Europe and another recession at home.

At least Washington and Wall Street managed to dispel the old saw that “gridlock is good” for the markets—a saying that isn’t backed up by historical data anyway, according to Standard & Poor’s Chief Investment Strategist Sam Stovall. Since 1900, Stovall wrote in a research note Wednesday, the average gain of the S&P 500 index in years during which Congress was split was less than half the gains made when the president and Congress are all from the same party.

The good news is that the stock market is notoriously poor at predicting recessions. It may be true that, as Stovall notes, every recession since 1948 has been preceded by a market decline of 14 percent or more. But the market often gets jittery even if recession isn’t on the horizon. Nobel Prize winning economist Paul Samuelson joked decades ago that “Wall Street indexes predicted nine out of the last five recessions,” and the numbers now may even be worse. Since World War II, Stovall says, there have been 83 pullbacks of 5 percent or more, but only 12 recessions.

The bad news is, of course, that investors still have plenty of reasons to speculate about economic contraction and the need for a third round of quantitative easing by the Federal Reserve. The Commerce Department reported Tuesday that consumer spending dropped in June for the first time since September 2009. The day before, the Institute of Supply Management said that manufacturing activity in July fell to its lowest level in two years. And on Friday, the government announced that GDP growth in the first half of the year was the slowest since the end of the recession in June 2009.

“Everyone realizes the economy is now on life support again,” says Stovall. “The soft patch has become even softer, and now the question is, will it turn into quicksand?”

As unnerved investors try to figure out the answer, they’ll be focusing next on the jobs data due out Friday morning.

More on the markets from The Fiscal Times:
10 Reasons Why There Won’t Be a Double-Dip Recession
Italy, Spain Debt Woes Rattle European Markets
Stocks Now Down for the Year