U . S . S t r a t e g y R e p o r t
1 Leading economic indicators are positive.
The Conference Board’s Index of Leading Economic Indicators, which is designed to anticipate changes in the economy by
three to six months, rose 0.6% in July for its fourth consecutive gain. This gauge has an impressive track record of calling
turns in the economy. The stock market, another leading economic indicator, has already rebounded 50% from its March lows.
2 Global economies are recovering.
The Organisation for Economic Co-operation and Development’s (OECD)1 composite leading indicators for its member
countries recorded their largest increase in June since records began in 1962. For the first time ever, all 33 countries
recorded an increase. Japan’s economy grew this past quarter for the first time since early last year. Europe also appears
to be pulling out of recession, with positive growth reported in the most recent quarters in Germany and France.
3 The job market is improving.
Non-farm payrolls fell by just 247,000 in June, while the unemployment rate eased from 9.5% to 9.4%. The rate of
decline in payrolls has been improving since January, when payrolls declined by 741,000. Employment has been a
lagging indicator of the economy, improving at the end of or well after every recession in the postwar period.
4 The Federal Reserve’s efforts to stabilize the financial system worked.
The massive efforts to slash interest rates and provide trillions in funds to the financial system have succeeded in restoring
conditions in the money and corporate credit markets. Corporate America has taken advantage of attractive rates to refinance
old debt and fund new acquisitions. Companies issued more than $800 billion in new bonds during the first seven months
of 2009 – nearly a third more than a year earlier. In the money markets, the three-month London interbank offered rate is
down to 0.43%, less than one-tenth of where this short-term benchmark stood at the worst of the credit crisis last October.
5 Bank lending is increasing.
Banks’ profitability and capitalization have improved, and banks have started lending again. According to the Fed’s recent
periodic survey of banks, about 30% said, on net, they tightened lending to businesses in May, June and July, but that’s
down from roughly 40% in April’s survey. The percentage of banks that tightened standards on commercial real estate
loans dropped 20 percentage points to 45%. For residential real estate, the percentage fell to 20% from a peak of about
75% a year ago. Most banks expected lending standards across all loans would remain tighter than their average levels
over the past decade until at least the second half of 2010. However, the improvement in bank lending should be enough
to support economic recovery.
6 Expectations for 2010 economic growth continue to improve.
❚❚ In a recent Wall Street Journal survey, 80% of economists said they believe the recession either has ended or will end by
September. In addition, economists continue to upgrade expectations for growth in the rest of 2009 and beyond.
❚❚ The top 50 U.S. economists2 expect the economy to grow 2.2% in the third quarter, after falling just 1% in the second quarter.
❚❚ Economists in August lifted their projection for third-quarter growth by 1.2 percentage points over July’s estimate to
2.2%, according to the median of 55 forecasts in a Bloomberg News survey. That is the biggest such boost in surveys
dating from May 2003. Forecasts for 2010 were raised to 2.3% from 2.1%.
❚❚ The International Monetary Fund said in a recently revised forecast that the world economy will expand 2.5% in 2010,
compared with its April projection of 1.9%.
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7 Housing has bottomed.
Sales of existing U.S. homes jumped more than expected in July to the highest level in almost two years, signaling the
worst of the housing recession may have passed. Purchases climbed 7.2% to a 5.24 million annual rate, the most since
August 2007, the National Association of Realtors said recently. The gain was the biggest since records began in 1999.
The S&P/Case-Shiller home price index advanced 2.9% in the second quarter from the previous three months, the first
increase since 2006 and the biggest in almost four years. Foreclosure-driven declines in prices, government credits for
first-time buyers and near-record-low borrowing costs are expected to continue stoking demand.
8 Manufacturing is on the rebound.
The Fed said industrial production rose 0.5% in July, the first increase in nine months. European industrial orders
increased 3.1% from May, the biggest gain in 19 months, according to the European Union’s statistics office. For the first
time since January 2008, an index based on a survey of U.S. purchasing managers crossed a threshold indicating factory
output grew. Manufacturing activity in China, France and Australia, among other countries, also expanded in August,
separate surveys showed. The pace of contraction in Germany and some other nations slowed markedly.
Alan F. Skrainka, CFA
Chief Market Strategist www.edwardjones.com Member SIPC
Don’t Bet Against History
Historically, the stock market has performed well once
recessions end. The chart below shows the performance of
the S&P 500 six and 12 months after postwar recessions
ended. While history is not always an accurate guide to the
future, it does suggest that investors who are out of the
market are betting against a lot of history.
Source: Ned Davis Research. Daily data starting in 1947. Six months measured by 126
market days; 12 months measured by 252 market days.
You Can’t Recover If You’re Not Invested
There are always risks to the outlook. The recovery could be
uneven, or something unforeseen might derail the progress
we’ve made. The stock market could correct at any time for
any reason. But these things are unpredictable. Our advice
remains the same: Don’t base your investment decisions on
predictions; base them on investment principles. Focus on
the things you can control: the quality of the investments
you own and the diversification of your portfolio. Maintain a
It looks as though the economy is improving, but that
doesn’t mean you should throw caution to the wind. Instead,
sit down with your Edward Jones financial advisor and talk
about ways you can take advantage of the improving climate
while still managing risk.
And remember, you can’t recover if you’re not invested.
1 The OECD, located in Paris, spells “organisation” as it’s listed.
2 Latest Blue Chip Economic Indicators survey
Information in this report is as of 9/2/09.
S&P 500 Performance after Postwar Recessions
6 Months Later
12 Months Later
10/31/1949 10.97% 19.57%
5/25/1954 18.63 29.98
4/30/1958 17.77 37.12
2/28/1961 7.86 7.51
11/30/1970 15.06 4.49
3/31/1975 6.57 30.63
7/31/1980 1.28 1.82
11/30/1982 15.46 22.18
3/28/1991 3.55 12.14
11/30/2001 -1.66 -10.04
7/31/2009 (est.) TBD TBD
Average 9.55% 15.54%
Why Does It Take So Long to Call Recessions “Officially Over”?
The official “scorekeeper” of recessions is the National Bureau of Economic Research (NBER), a private organization in
Cambridge, Mass. These folks aren’t terribly interested in forecasting turns in the economy. Instead, they focus on making
sure their recession start and end dates are absolutely accurate and not subject to future revisions. Robert Hall, who
heads the NBER’s Business Cycle Dating Committee, recently said it is “more important” this time around for the group
to adhere to the principle of not calling an end to the recession until after economic growth has surpassed its previous
peak, “which could take 18 months or more to determine.” The group took until July 2003, 20 months after the fact and
well after stock prices had begun to recover, to declare the last recession had ended.