Don't Count Out the Stock Market

"We don't expect a recession, but we do expect slow growth" and higher unemployment, wrote Ed Hyman, chairman of the ISI Group, a survey-heavy research firm, on Jan. 14. Gloomy forecasts in steel, retail and advertising spending appear to back the doomsayers, he noted, but ISI's own model, which correctly forecast the 2001 recession, isn't pointing to another one right now.

At Charles Schwab, chief investment strategist Liz Ann Sonders pegged recession odds at better than 50%, but added that getting the official determination will matter little to investors. "Calling a recession is tricky stuff. Market timing is treacherous, and so is trying to invest based on this data," she wrote. "The caller and record keeper of recessions is the National Bureau of Economic Research (NBER), and it's notoriously late in calling recessions, having dated the past two after they were already complete. So, if you're a trader/market timer, and you're waiting until the recession is declared to sell everything, you'll probably be too late and you could miss a heck of an eventual move higher to boot!"

A soft landing might well result in a stronger stock market, but it will be a volatile one in any case, she predicted.

Noted optimist Ed Yardeni, president of Yardeni Research, continues to believe that global economic resilience will stave off the worst. His updated forecast Thursday wasn't rosy, but in the context of the recent housing, mortgage, financial and credit woes, it could have been worse.

"We're still predicting the economy will 'Muddle Through,' with 1.5%-2.0% GDP growth during [the first half of the year] and a pickup to around 3.0% during [the second half of the year], thanks to the aggressive easing by the Fed," Yardeni wrote. "We expect them to keep the federal funds rate at 3.0% over the remainder of the year."

The Federal Open Market Committee's one-two rate-cut counterpunch was well received, especially by Yardeni, who had rebuked Fed Chairman Ben Bernanke on Jan. 22, the day the global markets went down for the count.

"Come on, Ben, you are no longer chairman of Princeton's economics department," he wrote. "Stop being so nice to your colleagues on the [Federal Open Market Committee]. Remind them that you are one of the world's leading experts on the Fed's role in causing the Great Depression. Tell them that the Fed must get ahead of the markets during financial crises and cut interest rates dramatically."

Other measures, such as the proposed federal stimulus package, weren't greeted with much enthusiasm. Bond guru Bill Gross of PIMCO explained why in his February commentary.

"It will be of marginal benefit to long-term prosperity," he wrote. "To understand why, consider that the productivity of our economy ultimately depends on its ability to 1) innovate, and 2) save and invest, and that there is little of either in this stimulus package. Some have even suggested — and with my somewhat grudging concession — that this package will help the Chinese economy more than ours. Americans will use the rebates to buy Chinese imports offered at Wal-Mart and the $150 billion will then wind its way inevitably back to Asian coffers."

Whoever ultimately benefits the most from relief measures, the risk-benefit analysis now favors the risk-takers, according LPL Financial Services strategist Jeffrey Kleintop.

"We recommend increasing the weighting in stocks and reducing bond market exposure, while at the same time shortening bond market duration and raising exposure to high yield bonds," he wrote Jan. 29. "For a growth with income asset allocation, we recommend shifting 5% to stocks from bonds, shifting the allocation from 65% stocks to 70% stocks. The sharp reaction in the markets to the slower pace of economic growth has increased the risk in the high quality bond market, while stocks have already priced in the risk of a recession."

For more of what our pundits are saying, read their latest predictions here.