What is the Right Analogy: 2008 or 2009?

A good way to focus on the problem is Ginger or Mary Ann 2008 or 2009?The 2008 Analogy

Nearly everyone is committed to warning that this is another 2008, that Europe faces a “Lehman situation,” that a recession is imminent, and woe is us. The argument is that the market knows all, so everyone should ignore the economic data or actual information about banks. Investors are told that no source of information is accurate or honest.

Does this make any sense? My friends at Global Economic Intersection are no softies when it comes to economic worries. They have a tough set of recession indicators. Wisely or not, Steven Hansen (one of my favorite sources) has chosen to include the stock market as a recession signal. Here is his take:

Although hard to believe, there have only been five groupings of penetrations below zero growth of the S&P 500 year-over-year since 1990. Score = 3 recessions, 2 false alarms, and one “wait-and-see”.

I hope that my astute readership will be unimpressed by this marginal indicator on a handful of cases. For your consideration, here is the chart:

To emphasize, if the market was always right, you could never gain an advantage. Making strong returns involves stepping up when the market is wrong. The greater the irrational fear, the more difficult it is.

The 2009 Analogy

I think that the Spring of 2009 is a better comparison. There was a similar aura of gloom that did not fit reality. Here is what we see –actual data on earnings (excellent), earnings expectations (more than excellent), actual economic data (in line with GDP growth of about 2%, (not recessionary).

In March, 2009 I expressed some frustration in what began as a three-part series explaining the following:

• Why people do not believe economic and earnings forecasts.
• Why politics interferes with investment decisions.

Before I could write the third part of the trilogy, the market had rallied. Doug Kass was the guru who really nailed this, calling a “generational bottom.” Here is what I wrote on the Kass call and market valuation.

Doug had a very sensible approach to valuing individual stocks and the market — level-headed and based on data.

Here is the challenge for investors: If you are going to buy when others are fearful and sell when they are greedy, how do you know when to act?

Doug advised using data, and I agree. What is his current advice?

In an interview segment on CNBC’s Fast Money he tries to focus on the numbers — earnings, the current GDP growth rate, the huge risk premium indicating that stocks are cheap by historical measures. He even harkens back to the 2009 time frame and emphasizes that the “bottom is in” and is year-end target of 1200 on the S&P. Stocks are as cheap as at the time of the “generational bottom.” Take a look at the whole video.

Investment Takeaway

There are many long-term investors who have been sorely tested by the recent market action. Everyone in the media tells them that they are wrong and stupid.

While I do not offer specific investment advice at “A Dash” I am happy to suggest some general precepts:

• Fear is exaggerated. This is not 2008.
• Recession fears are overstated. Mainstream sources are at 30% odds, and the best sources are lower.
• Earnings are solid, even if the economy is weak.
• Earnings haircuts for a “normal” recession are already priced in.
• US companies have less European exposure than feared.
• And most importantly — nearly every media source is politicizing the investment decision. It is more important than ever to divorce your investments from your politicial ideology.

Investors need not and should not go “all in” but neither should they go “all out.”

And for the record — my vote is for Mary Ann.