Question: Is the recession ending? Any good news in sight?

A BuyandHolder

Dear BuyandHolder,

As you obviously know from the way you phrased your question, there is no definitive answer. On the whole, some bright spots have appeared on the horizon. But the negatives are still hanging in there. Let’s look at the bad news first, followed by the good. Then we’ll try to draw an intelligent conclusion!

According to the minutes of the Federal Reserve Board’s late June meeting, the Fed raised its fourth-quarter unemployment forecast to 10.1%. It stated that it anticipates such a high rate through 2011.

As long as there is substantial unemployment, or fear of being fired, Americans will shop less, hurting retail sales. And, at the same time, companies will not be purchasing major equipment and will cut back on smaller items and supplies.

Note: Our unemployment rate is at a 26 year high.

However, in the same statement, the Fed said it believes the economy will be stronger than anticipated in the fourth quarter of this year and throughout 2010 – based on stabilized consumer spending, a slowing down eventually of home foreclosures and greater savings.

So, if you follow the Fed’s line of reasoning, there is an end in sight.

The positive outlook from the Fed immediately helped push up the Dow Jones Industrial Average. Yet, we all know that trend may not last. When negative news hits, the Dow is likely to fall.

Other positives…

The Fed’s comments were made just prior to some surprising good news – unanticipated strong second quarter profits from a handful of blue chip companies. They include a chip maker, an investment company, a major bank, a huge toy manufacturer and a large drug company.

Subsequently the point gain for the Dow this week has been:

Monday: up 185 points
Tuesday: up 28 points
Wednesday: up 257 points  
Thursday: 96 points
Source: Chicago Tribune

And, retail sales were up 0.6% last month. That’s the second straight increase and perhaps a sign that the economy is gaining some strength.

Bottom line: Even if Americans continue to spend more, helping end the recession (the longest since World War II), the recovery will certainly be a slow one.

TIP: Track the second quarter earnings reports from other major companies…if you see a continued positive results, it’s fare to say you can be optimistic about the recession taking a turn for the better. These companies may also be ones to add to your portfolio.