Ive been quite doomish on the economy for a while now, both on this blog and in the print version of Canadian Business. But maybe that’s just the Canadian winter having its subtle effect. With spring and now summer just about here, time to give the doom-saying a break. Its a beautiful day out. Why not round up some of the reasons to be positive about market prospects over the next little while.
Douglas Porter and Robert Kavcic, two BMO economists, have just released a draft version of a report, O Canada: We See Thee Rise, which makes a good case that over the medium-term, things actually look pretty good for the economy.
The ongoing thaw in credit markets should help things get back to normal. Sure, we’ll see some more bad data over the next few months, but the TED spreada measure of the spread between rates on three-month T-bills and the LIBOR rate that can indicate stock market downturnshas dropped back to 50 basis points, “not far from its long-term trend,” say Porter and Kavcic. As well, corporate bond spreads are closer to the levels they were at before September 2008 than they were at the height of the crisis. These are both very good, market-driven signals that better days are on the way.
Better yet, according to Porter and Kavcic, stock markets typically pick up four to six months before the economy does, and so the recent advances in stock indexes suggest a recovery sometime “between July and August.” Good news that. Commodity markets, which are up 30% from recessionary lows, are also starting to price in this recovery.
But what about the big jobless claims we’re seeing? Porter and Kavcic point out that unemployment claims typically peak close to the endof a recession. If you consider that the U.S. was still churning out negative employment numbers into 2003, “almost two years after the last recession had ended,” it might not be something to worry about.
Also good is a pick up in the ISM Manufacturing index. In a previous Canadian Business feature, Myles Zyblock, chief institutional strategist at RBC, explained the importance of the ISM. In their report Porter and Kavcic point out that it’s now at 42.8, on the cusp of recovery.
So with car and home sales seemingly on the verge of a turn is it all-clear for the medium-term?
Perhaps. Fellow BMO economist Sherry Cooper, one Canadian economist to take a Roubiniesque-position through the downturn, is also brightening up.
According to a recent report she suggests the worst of the financial crisis is behind us and that U.S. and global economies are bottoming. She’s now predicting “moderate” growth by the end of the year, a dramatic turnaround from the big 6% contractions we saw last year.
Another positive sign she points too is the ability of troubled Bank of America to raise equity to bolster its capital base. The surgical, in-and-out of the Chrysler bankruptcy is another reason to cheer. Let’s hope GM goes as well.
Of course, we’re not all the waythrough this. It’s worth noting that all of the commentators offer “mid-term” outlooks. There are still some big issues outstandingwhat happens when the boomers get really serious about pulling in consumer spending after 2010?but that’s a worry for another day. Let’s enjoy this summer rally of 2009, a blessed break after a brutal winter of ’08-’09.