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Investment Review and Outlook
Fall 2010
The 2011 Economy: “Double Dip” Recession Or Recovery?
“Business conditions never stand still. Prosperity is followed by a panic or a crash.
National income, employment, and production fall. Price and profits decline and men are
thrown out of work. Eventually the bottom is reached, and revival begins.”
Paul A. Samuelson1
All of the stock market benchmarks sported hefty gains for the quarter just ended, as the “bulls” took
Wall Street by storm. Including dividends, the S&P 500 and Dow Jones Industrial Average returned
11.3% and 11.1% respectively, while the technology-laden NASDAQ delivered 12.6%. As a result,
year-to-date performances were comfortably in the black (S&P 3.9%; DJIA 5.6%; NASDAQ 5.2%).
Figure 1
The 2010 Stock Market In Perspective
Cumulative Value Per $Invetsed
$1.25
$1.00
$0.75
$0.50
S&P 500
NASDAQ
DJIA
$0.25
9/30/2007 12/31/2007 3/31/2008 6/30/2008 9/30/2008 12/31/2008 3/31/2009 6/30/2009 9/30/2009 12/31/2009 3/31/2010 6/30/2010 9/30/2010
Notice in the figure above that the stock market turned up (strongly) in early March 2009, even though
the “bears” were worried that the economy might slip into a depression. Given the prevailing wisdom, a
lot of investors probably abandoned equities. That was a mistake. Stocks surged over the ensuing 18
months (S&P 55.2%; DJIA 52.9%; NASDAQ 71.9%). What’s the explanation?
As we detailed at the time, stock market participants, who back their opinions with hard-earned cash,
weren’t buying the doomsday scenario. They were right.2
1
Paul A. Samuelson, “Economics,” McGraw-Hill Book Company, Inc. (1948), p. 391.
See “The 2009 ‘Bear’ Market: Is A Bottom Forming?”, Investment Review and Outlook, Boston Research and
Management, Spring 2009.
2
BOSTON RESEARCH AND MANAGEMENT, INC.
1
A WEALTH MANAGEMENT COMPANY
Given its importance to financial market returns, significant attention is given to divining the path of the
economy. After all, as the economy goes, so go profits, dividends and share prices. So where’s the economy
headed?
As even a casual examination of historical data confirms, Gross Domestic Product and forward-looking
share prices are linked (Figure 2). So when the stock market rebounded, it was a clear signal that the
economy would follow suit. From this perspective, it’s not surprising that the longest recession in postwar
history officially ended in mid-2009, according to a newly released National Bureau of Economic
Research report.3
Figure 2
2011 Real GDP Implicit Market Forecast: Recovery
8%
6%
Real GDP Growth
4%
2%
Historical
Average
0%
-2%
GDP Forecast (derived from prior-year financial market prices)
Actual GDP
-4%
1962
1969
1976
1983
1990
1997
2004
2011 (Forecast)
Once again, market participants are at odds with the experts (and far more optimistic).4 While early yet,
financial market price movements suggest that next year’s real GDP (Figure 2, green “marker”) will
exceed its historical average growth (3.2%) for the first time since 2004 - good news for equity
investors.
Still, while the odds of a “double-dip” recession are remote, they’re not zero. Plus, today’s political
climate remains murky. Prudence dictates a defensive allocation across stocks, bonds and cash
equivalents. Equity holdings should emphasize yield support and fixed income portfolios should remain
“laddered” across relatively short average maturities (to safeguard against a potential “bond bubble”).
Boston Research and Management, Inc.
3
On September 20, 2010, the Business Cycle Dating Committee of the National Bureau of Economic Research (Cambridge,
MA) announced that the recession ended in June 2009 and that any future downturn would mark the beginning of a new
recession (i.e., a “double-dip” recession).
4
According to a survey of the nation’s top 50 economists, 2011 GDP growth will slump to 2.5% from this year’s projected
2.7% rate (BlueChip Economic Indicators, October 10, 2010).
BOSTON RESEARCH AND MANAGEMENT, INC.
2
A WEALTH MANAGEMENT COMPANY