Experts see specter of double-dip recession
This stock market is not for the squeamish, money managers and economists said on Thursday, reacting to a two-day plunge.
"Is this the buying opportunity of a lifetime or a harbinger of things to come?" asked John Milne, CEO of JKL Milne Asset Management, South Side. "With all this market volatility, most investors should probably sit on the sidelines for the time being."
What's coming looks increasingly like a double-dip recession, according to some experts.
The Dow Jones industrial average yesterday lost 391 points, or 3.5 percent, closing at 10,733.83. That followed a 2.5 percent drop on Wednesday, when the index lost 284 points. The total two-day drop was 675 points, or 6 percent. Nineteen stocks fell for every one that rose yesterday.
"There is a growing risk that sustained weak confidence could put downward pressure on demand and business activity, causing the economy to potentially dip into recession," said Ken Goldstein, an economist at The Conference Board in New York.
"While the chance of that happening remains below 50-50, the odds have certainly increased in recent months," he said.
Two factors loomed large this week: the likelihood of Greece defaulting on its debt -- and the resulting financial fallout -- and a stark pronouncement from the Federal Reserve about the U.S. economy on Wednesday.
The Fed's rate-setting open-market committee cited "significant downside risks to the economic outlook, including strains in the global financial markets," a reference to Greece and possibly other Eurozone countries.
The central bank saw little reason to raise interest rates "through at least mid-2013," meaning it did not foresee significant economic growth for another two years.
"I've been doing this for over 30 years, and I've never seen such a candid statement from the Fed," said Milne, who manages fixed-income investments.
Some economic signs remain positive. The Conference Board's index of leading economic indicators rose 0.3 percent in August, the fourth consecutive increase, the private research group said.
But of the 10 measures used to compile the index, only four rose in August. A recession is defined as two straight quarters of negative economic growth.
Dean Baker, an economist at the Center for Economic and Policy Research in Washington, thinks the economy can avoid a double-dip recession, but he is worried about its "weak positive growth," he said in an interview.
"We still have over 9 percent unemployment and should be seeing GDP (gross domestic product) growth of 3 to 4 percent," Baker said. "Instead, we're seeing growth in the 1 to 2 percent range, which is not even fast enough to keep unemployment from rising, and that's not good."
Many experts are concerned that not only Greece, but even Spain, Portugal or Italy could default on their debts.
"That would be like Lehman Brothers' failure, where some banks would become insolvent, and you risk a chain reaction," said Baker, referring to the investment bank's September 2008 bankruptcy that touched off a market plunge amid the mortgage and credit crisis that set off a months-long financial panic.
Another uncertainty for investors to digest is how -- or whether -- Congress' supercommittee of 12 will find at least $1.2 trillion in budget cuts within the next two months to try to balance the bleeding federal budget.
"There's a 50-50 chance they might come up with a credible solution," said James Burnham, distinguished service professor of economics at Duquesne University's Donahue Graduate School of Business.
Burnham said manufacturing and the oil and gas industry are relative bright spots in the economy. But he is concerned the housing industry will take a long time to recover from years of overbuilding, no matter how attractive mortgage rates are today.
"I think the odds are 60-40 that we won't decline into a double-dip recession," he said. "But it's a cloudy picture."