Monday, July 12, 2010

Are double-dip recession risks overblown?

We recently read an economist's pronouncement that the risks of a double-dip recession had now increased from one-in-five to one-in-four.  Another economist we follow stated that while a decline back into recession was certainly possible, it was not at all probable.

Economic problems are getting such a high level of play in the media that one wonders if market participants have overreacted.  The front page of today's Wall Street Journal carries an article discussing how small investors continue to "flee stocks".

The second quarter of 2010 saw the S&P 500 decline by about 11 1/2% amid these concerns.  At the same time many of the market valuation measures continue to improve.  Of course, the U.S. economy could descend into another recession and validate all of those who are reducing their equity holdings, but if equity pricing over the long-term does return to near its historical levels investors may someday look at this as a buying opportunity.