A Second Quarter Surprise?October 22, 2012 Posted by: Joe Morgan, CFA
All my hopes and expectations, looking for an explanation
Have I found my destination? I just can't take no more
Typically, we look forward to a new year and all it may bring.However, considering the markets and the economy, it feels asthough many investors are already writing off 2009 as a lost cause.
The first obstacle in the way of recovery - improving the lack ofconfidence among market participants - is proving to be much moredifficult to navigate than in prior recessions. The governmentsupport programs (mostly four-letter configurations) are designedto encourage investors to invest and consumers to consume.Eventually, confidence will return, but zero percent Treasuryyields and the dismal holiday season are solid evidence that we arestill traveling into the tunnel as opposed to coming out.
Everyone, it seems, is of this same opinion to varying degrees.Some investors, for example, only want Treasury risk, while othersare happy with corporate risk - though with significantly increasedrestrictions.
However, by setting the lowest of expectations we increase theprobability of an upside surprise. Thinking back to school days,there were plenty of students happy with "B" grades because at somepoint in their academic development, they became convinced a "B"represented their best expectations. Today, we seem to be hopingfor a "D+" in 2009.
These undercut expectations could actually lead to a significantboost in confidence among market participants, allowing a base forgrowth to build during the year and increasing our expectations for2010.
For example, later this week we will get December's change innonfarm payroll figures which are expected to come in at minus500,000 - meaning half a million people lost their jobs last month.Should that figure come in significantly lower at, say, 200,000,the markets would react strongly, taking this as a message thatperhaps things aren't as bad as we believe. Of course, there willbe 200,000 people who feel differently.
A more likely scenario is for a "lessening of negative news" tooccur perhaps in the second quarter. It's quite possible...Read More