In our last Review & Outlook (2/4/08, p. 3), we noted that “… the stock market is a leading indicator! Of these stock declines associated with recessions, the largest parts occurred before the recessions began, with very little occurring during the recession itself.”
That was written in late January, soon after the S&P 500 hit an inter-day low of 1,270 on 1/23. As we write this now, the S&P 500 is about 9% higher than its January low and that’s in spite of an unrelenting stream of bad news on the economy since then: weaker housing, higher unemployment, record oil prices, notable earnings disappointments, etc.
The market’s gains since late January have hardly been in a straight line (and we think there are good reasons why volatility may remain elevated). And somewhat deeper market lows could certainly be made – after all, the credit crisis is severe and no-one knows what surprises lie ahead. But precisely because of the widely heralded economic weakness, as counter-intuitive as this may seem, the stock market offers lower near-term risk and better long-term return prospects today, in our view, than it has for some time.