That troubling 'R' word

by

Published: January 28,2008

It was an economic event reaching around the world. Last week’s international sell-off of equities, fueled by the woes of the U.S. real estate market, caused shares to plummet across world markets. The January 21-22 situation cost Hong Kong’s stock market $321 billion in value.

On January 22, the Fed acted quickly to the market situation, slashing its benchmark interest rate. International and U.S. markets rallied on the news and rebounded. But is it a short-term fix? Is a recession looming? Are we in one now?

M.L. “Matt” Ballew III, JD, LLM, chairman of Security Ballew in Jackson, does think we are in a recession now. Stacey Wall, president and CEO of Pinnacle Trust in Ridgeland, gives a recession a 50/50 shot. Ashby Foote, chief investment officer at Vector Money Management in Jackson, sees the international sell-off as “eerily similar” to the stock market crash of 1987, but was encouraged by the rebound.

“Like 1987, this situation is also a referendum on U.S. policymakers as it relates to the value of the dollar, and also as it relates to the leadership of our financial services sector, which has contributed to much of the mayhem and chaos in the credit markets,” Foote says.

Where’s the bottom?

Two burning questions for Mississippians are when will the market bottom out, and what effect will it have on the state’s economy? Opinions on the former question are mixed, while there seems to be relative optimism on the latter.

Wall believes the market will bottom out around May, and sees a possible good second-half of the year. Noted for his analysis, Wall adds, “Based on the 10 recessions since 1945, the stock market tends to anticipate the slowdown by declining into the recession before recovering in anticipation of the recession’s end.

“What is particularly interesting to me is the tendency of the market, on average, to drop for the first five to six months of a recession before rallying substantially. Additionally, our research indicates that the low in the stock market in a year when the incumbent party loses has been, on average, in May. Recessions usually begin when the four coincident indicators of the economy turn down. There is a good chance that happened in December, making May the month for a bottom and matching the data for years when an incumbent party losses.”

Ballew does not see the U.S. stock market reaching a “solid” bottom this year, and anticipates continued market woes over the next two to three years.

In terms of the effect of this on Mississippi’s economy, none saw a direct or unique negative impact. Wall points out that Mississippi sees few boom times, thus sees fewer valleys.

Ironically, Ballew sees Hurricane Katrina as a plus. He says the continuing recovery efforts on the Mississippi Gulf Coast should serve as something of a buffer for the Magnolia State.

But a trickledown effect is expected. Nancy Lottridge Anderson, CFA, president of New Perspectives Inc. in Ridgeland and a finance instructor at Mississippi College, emphasizes that the U.S. and state economies are consumer driven. If credit concerns stop the flow of money, retailers and the tourism industry, especially casinos, could suffer.

Silver lining

All interviewed for this story agree with Anderson that now is not a time to panic. The Internet and 24/7 news media are stoking fears, they say. In fact, the crisis may result in excellent investment opportunities.

Walls says following the 10 recessions since 1945, “The market’s performance has been exceptional with the S&P 500 up by a mean of 16% three months later, 24% six months later and 32% a year later.”

Foote points out that the stock market is not the only game in town.

“While the stock market gets all the headlines, there are other important markets that have been a huge tailwind for the Mississippi economy,” he says. “The farm belt is enjoying one of the best boom markets in memory. Over the past two years, chicken is up 12%, cotton 24%, soybeans 116%, corn 138%, eggs 146% and wheat 164%. Also enjoying the rise in soft commodities are the farm suppliers like fertilizer producers and farm equipment. Now, for sure Mississippi today has more individual investors than farmers, but still it is important not to get too caught up in every hysteria that Wall Street throws at us.”

Anderson sees the Fed’s interest rate cut as a potential shot in the arm for the ailing real estate market. And lower interest rates could stimulate borrowing and, thus, spending.

Other measures by the federal government are being mulled to help avert a deepening crisis. President George W. Bush is pushing for an income tax rebate to put money in consumers’ pockets.

For Ballew, he sees this as little more than bandaging. He lays the root of the current situation at the feet of debt. Ballew says debt levels are extremely high, and savings are at historic lows.

Succinctly, he adds, “U.S. consumers are tired and up to their eyeballs in debt.”

Contact MBJ staff writer Wally Northway at wally.northway@msbusiness.com.

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