us economy entering self sustaining expansion Doll

Despite the negatives that still exist, Bob Doll explains why indicators such as upward revisions in Q4 data and falling unemployment numbers mean the US recovery is sustainable.

us economy entering self sustaining expansion Doll


Equally important, the report showed large upward revisions to November’s and December’s data and the numbers regarding income and hours worked were also pointing in the right direction.

Economic weakness

There are some pessimists that would point out that some areas of the economy are still weak. Household income levels are still relatively low and the housing market remains a significant source of weakness, with foreclosure levels still quite high.

Additionally, the positive fourth-quarter GDP report was based at least in part on inventory increases, which is hardly sustainable.

In any case, however, it appears to us that the economy may finally be entering into a self-sustaining expansion. Jobs growth is helping to generate an increase in spending levels which, in turn, is helping to support further gains in jobs. Should these trends continue, they would go a long way towards helping the economy continue to enjoy momentum.

Since the start of the year, the economic and market news has clearly trended in the right direction, so it’s worth asking what some of the negatives might be.

Chief among them is ongoing fears of the European debt crisis spiralling out of control. The Greek debt restructuring talks are becoming more complicated, and while it appears that markets are prepared for some sort of eventual debt default, investors are still expecting any default to at least be somewhat orderly.

Should we see a chaotic default (in which Greece simply walks away from its obligations, for instance) that would serve as a significant disruption to the positive trends we have seen.

Negatives already priced in

Additionally, in the US there is still a risk that we will not see an extension of the payroll tax cut and unemployment benefits that are due to expire at the end of February. If they are not extended, that would act as a near-term drag on spending levels.

We would also add that there is the always-present risk of some sort of unforeseen geopolitical turmoil emerging that could act as a drag on the economy and could drive risk assets down.

Certainly, these risks cannot be ignored. However, as we said at the beginning of the year, what we are really looking for is an environment that is not worse than what is expected. In other words, we do not need to see risks vanish or tremendous upside surprises for equities to perform well – merely having an OK backdrop should be good enough for stocks.

Notwithstanding the strong performance of the past month, we believe markets are still pricing in a more negative economic backdrop than what we are predicting. Investor confidence remains low and many are still sitting on large amounts of cash.

It is important to remember that stock prices have not completely recovered from the significant drawdown that occurred in the summer of 2011, suggesting that markets have further room to run.

We are not expecting to see uninterrupted smooth sailing from here, but we do believe that the trends for stocks are pointing in the right direction.


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