We Like Good News Too!

My parents have a friend (“JR”) who has a sign on his desk that says: “We like good news too!” It seems lately that investors have been inundated with massive quantities of the bad stuff, so in a nod to J.R, it might be time to trudge out some glimmers of good news.

The Fed is our friend: It may have taken six months for Ben Bernanke & Co. to jump on the problem, but it is now clear that the Fed is acting aggressively and creatively. Whether that means using arcane rules to supply the financial industry with much-needed liquidity, or dropping the Fed Funds rate (the Fed slashed rates by ¾ of a point yesterday to 2.25%, a full three percentage points from last year’s peak of 5.25%). Investors greeted the news with great fanfare, sending stock prices soaring higher!

Some companies are making money: We have not officially entered the statistical definition of a “recession” (the economy has yet to post even one quarter of contraction), but earnings at many firms have already started to contract. While the financial companies are the obvious big losers, there are some companies that continue to thrive, including exporters and large multi-national firms with a major overseas presence. According to Thomson Financial, if you exclude the financial sector, profits for the rest of the S&P 500 companies are expected to have grown nearly 12% in Q4 of 2007 and to grow nearly 9% in the first quarter this year.

Because this slowdown/recession started in the US, there is no way to shield most US companies from the damage, but growth abroad has been a powerful driver for many US firms. Also, US companies came into this period better prepared than in the last recession--based on almost any fundamental metric, corporate balance sheets are healthier today than they were in 2002.

Velocity can work both ways: From the market’s recent peak on Oct. 9, 2007, and recent bottom on March 10, the S&P 500 fell 19%. There have been three other periods in the last 20 years when stocks have lost so much in such a short time: in 1990 (S&L), 1998 (Asian currency crisis) and 2000. The 2000 swoon, prompted by the bursting of the tech bubble, quickly developed into a nasty bear market. But in the other two cases, stocks recovered the next year. In the 12 months after the 1998 sell-off, the S&P 500 soared 40% and 12 months after the end of the 1990 correction, stocks had jumped 34%. The numbers may not work out exactly, but so far, we have in fact been pretty close to them. US stocks have on average peaked four-six months before the onset of recession and troughed eight months after the start of recession. We peaked last October and many believe that we are on target to meet the historical standard.

Negative may be positive: It may sound crazy, but the very fact that people are turning negative may be a positive development for the slumping markets. Often, stock market bottoms form when sentiment is at its worse, hence the old chestnut, “sometimes, when things look bleakest, it’s a sign the market is near a bottom.” We could be a long way from that point, but when you start to hear the words “crash”, “recession”, or data points from the Great Depression, you might think to yourself, we are closer to the end of this mess than the beginning of it.