Rally for Real? The Positives

Pat Dorsey: Hi, I'm Pat Dorsey, director of equity research at Morningstar. So, it's the 64 trillion, billion I'm not even sure what the numbers mean anymore question: Is this rally for real? Is this finally it? Are we out of the economic and financial debacle that we've been in? Or are we simply heading back down into another pit of financial market despair at some point in the near future?

It's a difficult question to answer. I don't have any firm conclusions, I'm afraid. But, there is a pretty long list of positives and negatives. When I listed them out this morning, at least, for the first time in quite a while, the positives did outweigh the negatives, at least in terms of the number of them. So, let's go down kind of the good and bad in the economy right now.

So, for one, there's an index called the Leading Economic Indicators. This is a composite of 10 different indicators that's been used for several decades to help forecast the economy. And it's actually pretty darn good at calling turns in the economy, when we're about to roll into a recession or come into a recovery. And it looks like this data series may be bottoming. Again, you don't really know until hindsight, but it's showing some encouraging signs. So, that's sort of good data point number one.

Home price declines are slowing. They're still going down nationally, home prices are, but it's not quite in free fall anymore. You are seeing that rate of decline slow. And frequently, in financial markets, you get the turn not when things turn positive, but when things go from going down very steeply to just kind of going down at a slower pace, when that sort of rate of change changes, so to speak.

Bond spreads are down. This is another big positive. Both the rates that banks charge each other to borrow money that's called the LIBOR spread as well as the rates that companies borrow at in corporate markets, either investment grade or high yield. These spreads are still high, which we'll get back to on the bad part of things, but they are coming down, and so that is a positive showing that the economy is healing to some extent.

Consumer spending is stabilizing. Again, kind of like real estate prices, it's not good, but it's not as bad as it was. It's not in free fall anymore. You are seeing some signs of stabilization there.

Auto sales probably will be up ticking fairly soon, because auto sales simply can't stay at eight to nine million units for very long. Cars do wear out, and we've seen a leading indicator of this in the fact that the price of used cars it's called the Manheim Index has risen substantially in recent times. And so that might foretell a rise in new car sales, at some point in the near future, as perhaps the TALF restarts auto credit markets and as cars, frankly, simply wear out. So, that could be another positive boost to the economy.

Real wages are moving higher. Real wages declined for several years, and they're actually ticking up recently. That's often a good indicator of more consumption from consumers in times to come.

Big savings on the refinancing front with mortgage rates at such incredible lows right now I think we hit 4.78 on the 30-year fixed recently, if you have decent credit people are able to save enormous amounts of money, and so you are getting a little bit of a mini refi boom. A lot of mortgage lenders are talking about all the refi business they're seeing. And that puts more cash into consumers' pockets.

Of course, this giganto stimulus package that the Obama administration has pushed through, that's going to hit the economy, hopefully, like a sledgehammer, in a good way, fairly soon. And that should be a boost to economic activity.

You are seeing some bottoming in some real estate markets. You're hearing anecdotal evidence of bidding wars, believe it or not, in areas like Detroit and California that were some of the first to go in, indicating that perhaps prices have gotten so low that even in these depressed markets, people are seeing bargains. The market is finding a bottom, and you're seeing bidding wars once again in some small areas.

And finally, the final positive: time. We've been in this recession now for a year and a quarter, officially, even though it's felt like a lot longer. And even if we come out of it, let's say, the third quarter of this year or the fourth quarter, that would be one of the longest post-war recessions on record. So, the economy does heal itself in time, so time itself is a positive.

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