SCM: More Datapoints

Yesterday was simply brutal for the broad U.S. stock market. The S&P500 index closed about 19% below its 52 week high, just shy of the 20% rule of thumb for identifying a bear market. A rising crude oil price may have been a factor, as well as the Federal Reserve Open Market Committee, which proferred a more hawkish rhetorical stance, while standing pat on its 2% fed funds rate target, a level that is still well below the rate of inflation. We continue to believe that over the next few years, our current policymakers are clearly going to have to relearn the lessons of the 1970s. It won’t be fun, but it’s important to keep in mind that market opportunities are born of extreme circumstances. 

One important data point from the GDP numbers that caught our eye was a continued and accelerating contraction in real private inventories at the end of 2007, something that’s been a notable feature of every domestic recession since the late 1940s:

Despite this latest piece of evidence, it’s not yet clear whether any technical definitions of a recession have been met, and the NBER’s pronouncement won’t come until well after the fact. 

In the meantime, stimulus payments from the U.S. Treasury are providing a crutch to domestic demand. Unfortunately, such measures are short lived and temporary by design. Getting back to basics, the critical objective for the long term health of any economy is productive investment, which in our current circumstances can only be achieved through concrete and lasting measures designed to lift the flagging competitive position of the U.S. as a destination for capital and talent. Higher taxes and cheaper money simpy won’t get the job done.