Waiting for the Economy to Start Sprinting

Waiting for the Economy to Start Sprinting

Pacifica Partners’ Financial Post Weekly Column – December 17th 2009

This and other articles also available online at: Investment Waves Blog

As the global economy began to pull out of its tailspin this year, the markets began to anticipate an economic rebound quite correctly. The recession likely ended sometime this past summer for much of the world.

Does that mean that the markets have nowhere to go but up in response? Not necessarily. Markets tend to do a good job for the most part in being able to anticipate trend changes in the economy. The debate amongst investors and economists now centers on whether or not the economy is strong enough to stand on its own or whether it is still dependant on government assistance through ultra low interest rates and government spending.

Looking at third quarter GDP numbers from around the world, it seems somewhat surprising just how many countries reported GDP growth numbers below expectations. For example, Brazil’s economy – one of the strongest recipients of capital from investors around the world – reported that its economy grew by 1.3% instead of the expected 2% rate. In Canada, economists have had to temper their expectations of the economy’s rebound. The third quarter data show that the economy grew at a disappointing 0.4% annual rate whereas expectations were for 1%. Now, all eyes are on the fourth quarter and the hope that the US rebound continues.

Given that so many countries are trying to look to exports to lead the way towards economic growth, it is reasonable to ask “Who will be the buyer?” To that end, the world is still looking to the US consumer. Rightly, the US is pushing back on Asia and Europe by saying in effect – “you guys have to do your share of the lifting”.

Illustration: Courtesy – David Dees

Just recently, Australia’s Treasurer warned that the withdrawal of economic stimulus was a “dangerous misjudgment” and that without stimulus the Australian economy would have contracted. Australia’s central bank was amongst the first to begin hiking interest rates earlier this year.

At this point, investors should not be too concerned with the idea that the economy could fall back into recession – it is too early to know that yet. It is going to take some time to regain its footing and be able to function without the considerable support of government monetary and fiscal stimulus. That should serve as no surprise as there is a global deleveraging process underway and it will take some time.

However, investors should be careful when it comes to extending their investment portfolios too far in the belief that the markets will be able to continue the torrid pace they have been on. One of the greatest times to invest is coming out of a recession and some consolidation is a necessary adjustment process that often follows. Markets have begun to vacillate in a sideways range for the last several months. This is often the case after multi month bullish run-ups. However, investors should not take it for granted that the economy is necessarily going to make the jump to rapid growth. Challenges remain and markets may have gone a little too far, too fast for the time being.

To read this and more articles please visit the Financial Post online: FP Magazine Daily

Legal Disclaimer

This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information’s accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice. Past performance is not indicative of future performance. Please note that, as at the date of this report, our firm may hold positions in some of the companies mentioned.

Copyright (C) 2009 Pacifica Partners Inc. All rights reserved.

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