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Markman: Economic Worrywarts Have it Wrong

A lot of past doldrums has just been bad luck

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June has been the worst month of the year for stocks in the past 15 years, wresting the crown of badness from September.

As we motor into the thick of a potential June swoon, here are the big questions that top economists on Wall Street believe investors are mulling: 

1. Will the economy rebound from its current soft patch?

2. Will equities tip over when quantitative easing ends in July?

3. Will sovereign credits swoon if Greece is forced to restructure its debt?

4. What will happen to oil prices if Qadaffi is pushed out of Libya?

5. How soon will Japan recover?

6. What will happen to commodity prices if China is successful at slowing its economy?

Of all these, the most important for U.S. investors is the first. And I may be totally wrong, but my expectation is that the worrywarts have this wrong. 

Much of the lull in U.S. manufacturing has come about as a result of some abnormal weather conditions in the winter and spring, plus the effects of the automobile manufacturing kink created by the Tokyo earthquake. Another large part of the problem has been a surge in gasoline prices that has been a drag on consumer spending.

These seem to be transitory issues of the type that are usually, in retrospect, called a “growth scare.” To be sure, data last week was some of the weakest in two years, with no signs of strength in manufacturing, the Philly Fed report, industrial production, and unemployment claims. Plus we saw that home prices are still falling, governments are cutting back on spending, and payroll taxes are about to kick back in.

But there are some bright spots that don’t get as much ink. For one, people may be surprised to discover that the expansion is self-sustaining, in part because super-low interest rates have combined with the Fed’s asset-buying program to create a lot of stimulus that is not seen on the surface.

Plus, there’s no denying that earnings season shows us that corporate profits are strong and balance sheets are in fantastic shape, particularly after companies have been able to issue a lot of incredibly cheap debt. Credit card delinquency rates are way down, emerging market demand is still growing, a technology boom is emerging, gasoline prices are coming down, and the grain and cotton price surge of last year has been erased.

Also, we can’t forget that President Obama and Fed Chief Bernanke are both dead-set on doing what they can to improve the economy going into the 2012 election cycle, which is why the third year of the presidential cycle tends to be so strong historically.

And finally you can’t ignore the impact of the Japanese tsunami and nuclear crisis. They threw the world’s third largest economy for a loop, as industrial production in that country plummeted by 15% in March. That disrupted supply chains worldwide, with U.S. car and truck manufacturing on track to decline by 10% in the second quarter and Indonesia authorities saying they expect vehicle production to drop 15% year over year in the second quarter.

Article printed from InvestorPlace Media, http://investorplace.com/2011/06/markman-economic-worrywarts-have-it-wrong/.

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