by Kristina Zurla Landgraf

When the Eurozone debt crisis unraveled this spring, analysts began to speculate whether it could trigger a repeat of the recession that began in 2007. The big fear of a “double dip” recession among investors is whether that means the stock market will slide back to its recessionary lows hit during the 2008-2009 U.S. banking and mortgage crisis.

Some analysts have made a case that the recession that began in 2007 hasn’t really ended; it’s just seen a pause. The National Bureau of Economic Research (NBER), which makes the official declaration of economic cycles in the U.S., declared the starting point of the recession three years ago, but hasn’t yet declared its end despite GDP growth of 5.6 percent in the last quarter of 2009 and 2.7 percent in the first quarter 2010.

Lind-Waldock Senior Market Strategist Jeff Friedman said the “double-dip” recession outcome is unlikely given that we have two quarters of growth, and after the Group of 20 world economic leaders have pledged to reign in deficits.

At this weekend’s G-20 meeting in Toronto, world leaders pledged to halve deficits by 2013 and start to stabilize their debt-to-output ratios by 2016. The group also agreed to refrain from increasing or imposing new barriers on trade until the end of 2013 and reiterated support for the Doha round of World Trade Organization talks. However, the U.S. was reluctant to end stimulus measures. U.S. Treasury Secretary Geithner said the global recovery remains fragile.

The U.S. economy remains fragile. At the conclusion of the June Federal Open Market Committee Meeting, Fed policymakers were cautious, stating financial conditions were “less supportive” of economic growth and that they needed to keep the key short-term interest rate under their control unchanged for “an extended period.” Such statements haven’t instilled much confidence among investors.

Among recent reports, consumer spending in May rose 0.2 percent, slightly better-than-expected, but consumer confidence declined more than expected in June.  Friedman said most market participants are more concerned about the global macro outlook—namely the sovereign debt crisis, whether Chinese demand will pick up the slack, and whether China will allow their currency to fluctuate as promised. If we can get past those problems, the market should start to recover,” said Friedman.

He said the unemployment rate is certainly disappointing, but the data so far indicates “a slow, expanding recovery” taking place in the U.S., he said. “We are doing ok, not great.”

S&P 500 Strategy
Friedman said the S&P 500 may continue to struggle until investors regain confidence, but doesn’t see a collapse back to the 2009 lows. He sees a choppy to bearish trend in the third quarter, with a recovery coming in the fourth quarter. For now, traders should play the range between 1,040 and 1,120 in the September S&P 500 futures contract, he said, buying at the low end of the range and selling near the top end of the range with protective stops, until signs of a more definitive breakout appear.

Jeffrey Friedman is a Senior Market Strategist with Lind-Waldock based in Chicago. He can be reached via phone at 866-231-7811 or email at jfriedman@lind-waldock.com.

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