Recessions and Recoveries                                                               October 8, 2008

In our Thirty-Second Edition of Willingdon Views, back in March, we said this: “I think the debate is largely over.  We are in a consumer recession…”  At that time we were under weighted in consumer discretionary and financials, which was the right strategy.  Now it looks like the economy is in a full blown recession.  Cyclicals, in particular, have been hit hard. 

But if we are in fact in a recession, then the economy will enter a recovery at some point, just like it has after every one of the twenty one recessions the U.S. has experienced since 1900.  Moreover, the stock market will bottom well before the economy bottoms as it has in the past as well. 

The near term problem is a lack of confidence, pure and simple.  While a good bit of the current investor fear is warranted given the unprecedented woes in the financial sector, the doomsday prognostications by the screaming heads in the media only serve to add fuel to the fearful fire that has engulfed investor psychology.  The government is pulling out all stops to defrost the credit markets and get the economy moving again.  This in itself makes the current economic cycle unique, as the government has never been this proactive.  Yes, we are in an unprecedented credit de-leveraging cycle, but with government intervention, I believe we can navigate through this difficult time. 

I think we’ll get a good indication of what the rest of 2008 and perhaps 2009 may bring, from a market and economic perspective, over the next two or three weeks as third quarter earnings are released.  We will be watching closely the guidance and projections made by industry leaders as an indication of where the economy is headed.  If, in fact, some bell weathers can buck the trend and offer even the glimmer of good news, I think the market could rally sharply.  Expectations are very low across the board.   Good news in the near term might be a big if, but we’ll find out soon enough.  The earnings season has begun and a host of companies will report over the next two weeks.  In the meantime, we remain confident that there will continue to be a flight to quality in the equity market.  How one defines and identifies “quality” may be one of the most critical questions that needs to be answered.  More on that later.

Michael Kayes, CFA

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