28 Sep 2001 Hope
To wish for something with the expectation of its fulfillment
Our expectations for a market recovery were growing stronger in the days before the attacks as factory orders began showing improvement. After the markets’ week long close investors sold stocks with renewed fears of recession. The theme among pundits was that we were probably in recession before the attacks and that likelihood seems almost certain now. Experts further agree that the recession will be deeper than before, but of a shorter duration. There are several rationales for a shorter, deeper, or “V shaped” recession. The consumer, credited with holding this economy afloat for months, is undoubtedly shaken by recent events and will likely slow his spending. In effect, consumer confidence dropped in moments instead of grinding down slowly, over a period of weeks under the constant drone of layoffs and disappointing corporate profits. So, we have reached lower consumer confidence numbers much faster than we would have before the tragedies.
Two other rationales for a faster recovery come from our government. We have already seen the Fed drop the discount rate another ½% between meetings to 3.0%. It is widely expected that they will drop another ½% to 2.5% at their next meeting on Tuesday. Businesses use these low rates to improve their financial positions. Additionally, the Bush administration and our congressional leaders are building consensus on a fiscal stimulus package. Measures that will induce business investment include corporate tax reductions, investment tax credits, and capital gains tax cuts. They are looking at payroll tax reductions and tax rebates to stimulate consumer spending. In spite of Greenspan’s warning to go slowly, leaders seem bent and determined to spend much of the surplus on defense, re-building and investment incentives. These measures will serve to shorten the duration of the recession.
Finally, the private sector is doing what it does best – marketing. You have no doubt noticed the 0% financing offered by the car manufacturers. Airlines cruise lines, and hotels are offering deeply discounted packages to lure customers back. Christmas decorations may appear earlier than ever this year as retailers lure shoppers back.
I know the news is dark. But this period, tragic as it is, gives companies the opportunity to “clean house,” during a sort of moratorium to accept bad news. Every company with bad news shares it in the hopes that it will be lost among the noise of others’ confessions. The airlines were suffering before the tragedies and layoffs were inevitable. Other companies that became bloated during the boom use the moratorium to take rather dramatic actions to make themselves more efficient and more profitable, including laying-off employees. The bad news of recessions is obvious – people loose jobs. When they lose jobs they lose confidence and spend less, causing the economy to slow further. The chart below shows the relationship between consumer confidence and unemployment (which is inverted).
But recessions make business more efficient, stronger, and better competitors. The speed and breadth of the economic recovery depends upon businesses’ ability to create new jobs. Many more jobs were created in the latest expansion than were lost in the last recession. Our government’s challenge is to create the best incentives for investment and innovation. We know they can and will spend the money, but can they reach a consensus on an effective package in time to have a positive impact on this slowdown? We hope so.
We truly live in the Information Age. We are more closely connected than ever because of television, cell phones, and the Internet. We witnessed our “Pearl Harbor” on live television and were shocked together, as a nation. We experienced the horror of those in New York, the Pentagon, and in Pennsylvania as we heard their actual accounts in real time. No time in history compares to what we experienced, nor is any guidance offered as to what we might expect in the future. But, we hold a great deal of hope that we will recover soon, emotionally, physically, and financially. We take a great deal of comfort in the countless examples of the undauntable nature of the American spirit. As we view these accounts of compassion and determination on television or read about them in the media and Internet, we heal.
Our economy has been shocked before and recovered. We will recover this time. In my investing career, I have never seen as much will and determination on the part of leaders in government and business, and among private citizens to face this slowdown head on and to beat it. Soon, travelers will travel again, consumers will buy, and entrepreneurs, scientists, executives, and workers will all get back to business.