April Brings Shower of Uncertainty From Experts

Whether there is or isn't a recession, and whether it's a long one or a short one, remains up for debate among our market mavens. However, there's a growing consensus at least that a total meltdown isn't in the cards, thanks to aggressive March rates cuts and other actions by the Federal Reserve. As the experts watch, wait and wonder, concerns center on the health of the battered financial-services sector, the damage done to housing prices and that ability of American consumers to spend the economy back on the road to recovery once tax rebates hit their bank accounts.

"On one hand, the financial crisis is in many ways unprecedented, as is the housing bust," ISI Group's Ed Hyman wrote on April 7. "On the other hand, the policy responses are also in many ways unprecedented. That is not to say that the financial crisis is going to go away any time soon. And existing house prices are likely to continue to decline. But the policy responses are probably laying the foundation to prevent Armageddon."

With that rousing assessment in mind, Merrill Lynch's Richard Bernstein weighed in on the outlook for the beleaguered financial-services sector, which has written off billions of dollars in subprime mortgage loans and the related securities market.

"Depreciating assets, increasing regulation, government intervention, negative earnings surprises, equity offerings, and now a rally are great fodder for the media. Some investors, sensing undue fear, are trying to 'bottom fish.' That could be quite risky," he wrote on April 8. Bernstein called the sector a classic value trap of "stocks that appear to be undervalued but have no visible catalysts to keep them from becoming even more undervalued. Value investors typically underperform by buying stocks too early, and our strategists' work continues to strongly suggest that global financials fall into the 'value trap' category."

However, first-quarter earnings looked encouraging to J.P. Morgan strategist Thomas Lee, who called the initial crop of results a pleasant surprise, though one that occurs in the context of worst-case expectations.

"We realize skeptics will say that, 'sure, it is easy to beat estimates given the Street is looking for a decline of 15%,' but expectations (relative to fundamentals) are what matter more to stocks," he wrote in an April 16 note. At the time of writing, 93% of financial stocks beat diminished expectations, and the same improvements showed up in consumer staples and consumer discretionary stock, sectors that missed by a larger margin last quarter.

Liz Ann Sonders, chief investment strategist at Charles Schwab, saw the financial sector's performance as encouraging, due to its weight in the key S&P 500 stock index, "and perhaps more importantly, its influence on every area of the economy," she wrote April 11. "However, it's too early to tell if this is the start of a sustainable rise in both the financial sector and the overall market."

Tobias Levkovich, at Citigroup, doesn't think so. "We are more worried about the composition of earnings results for the second half of this year, possibly starting with the second-quarter earnings results," he said in an April 10 note. "Industrial production is likely to wane later this year because banks have tightened their credit standards markedly on commercial and industrial loans over the past nine months, and the benefits of the 2Q07 easy money are ending this quarter."

But other easy money may play a meaningful role on a retail level. Just as our pundits looked to the Fed to put the brakes on a meltdown, they're also looking to the government's wave of $600 to $1,200 tax rebates to add some pop to the consumer sector, despite recent plunges in the monthly and weekly measures of consumer confidence.

A spending spree may not happen as soon as the checks hit taxpayers' mailboxes, says Ed Yardeni, president of Yardeni Research.

"Many Americans go shopping when they are depressed. What about the surveys showing that they might save most of the checks that the Treasury is sending out now?" he wrote on April 30. "The same thing happened during Q3-2001. The following quarter they decided to spend it all after all. In other words, if they pay off their credit-card debts in May and June, they'll be primed to charge again in time for the back-to-school shopping season."

Sonders, in that same April 11 note, said the outlook for housing prices remains dismal, and that will weigh on short-term consumer decisions, and on investor behavior.

Uncertainty is the name of the game, and investors will have to lump it for now, writes Jeffrey Kleintop, chief strategist at LPL Financial.

"With encouraging signs of strength tempered by the steady rise in oil, we will continue to monitor conditions closely," he wrote April 28. "The rebates will help to offset the drags of housing and high oil prices on consumer spending. Also, the Fed rate cuts first enacted seven months ago will be kicking in to stimulate the real economy. We remain positive on the stock market and recommend above-average exposure to stocks; however, volatility is not likely to fade much."

The worst seems to have passed, but it's not clear the best is arriving any time soon.

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