While an oversold market served as the foundation for the two-month rally, hope of economic recovery sustained the push higher. I agree with many who believe that the economy may soon stop declining, but recovery is something different. Since Federal Reserve Chairman Bernanke mentioned “green shoots of recovery” during his 60 Minutes interview on March 15, the phrase has been glued to investors’ tongues as a way to defend being bullish. I find this attitude premature. When an economy has suffered the damage we have over the last 18 months, bounces off depressed levels do not indicate pending recovery. Consider one of the economic figures to be released this week—housing starts. Housing starts are bullish for the economy because builders employ workers and purchase materials with the expectation that they will profit when a house is sold. Higher starts lead to higher employment and higher economic growth. This week’s report is expected to show that housing starts increased to 520,000 from 510,000 the prior month (a 2% increase). While not a massive move, a 2% improvement in the most beleaguered asset class should be considered progress, hence the thought of “green shoots” appearing. However, take a longer view and the picture is dismal. Since data has been collected starting in 1960, housing starts bottomed near 800,000 four times—in 1966, 1975, 1981, and 1991. Currently they are at 510,000. We would need to see a 57% improvement in the metric to reach the bottom of prior cycles. This does not indicate “green shoots,” but instead a devastated economy that is reeling to regain its footing. The recession may be nearing bottom, but true recovery remains years into the future.
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