Merrill's North America strategist says recession will drag U.S. stocks lower

Monday, June 23, 2008

Merrill's North America strategist says recession will drag U.S. stocks lower

Posted Jun 23rd 2008 4:50PM by Joseph Lazzaro
Filed under: Forecasts, Bad news, S and P 500, DJIA
U.S. stock prices are likely to fall further because record energy and food prices are constraining consumer spending, suggesting a worse-than-average recession, Merrill Lynch's U.S. sector strategist said Monday, Bloomberg News reported.

Brian Belski, Merrill's U.S. sector strategist, said this is not "your average recession," and that he would "urge caution for investors attempting to call the bottom in the current environment," Bloomberg News reported.

On Monday the Dow Jones Industrial Average closed down 0.33 points to 11,842.36. The Dow has fallen about 1,400 points since trading above 13,100 in late April and again in mid-May. The Dow has also been below its 50-day moving average -- which technical analysts believe to be an indicator of short-term support or resistance -- for more than two weeks. The Dow also has been below its 200-day moving average -- a technical indicator of longer-term market support / resistance -- for about six months. Technical analysts note that a strong market and Dow would consistently remain above its 200-day moving average; a bearish market, the reverse.

Bearish on DJIA

Economist Peter Dawson echoed Belski's evaluation and said the March -- May rise in the S&P 500 and the DJIA was not rooted in strong evidence, fundamental or technical.

"Basically, for the last five months or so, the U.S. economy has been treading water, going sideways. At the same time, we had a Dow rally off the 11,800 lows in March. That suggested trouble if GDP growth did not accelerate in Q2," Dawson said. "It hasn't so far, and the Dow sold off. I agree with Belski in that there's considerable risk to the downside for the market given the trend in consumer spending and the overall risks to the economy."
Dawson said just at the point at which the U.S. economy had appeared to stabilize after digesting $400 billion in global asset write-downs stemming from housing-related credit market losses, already-elevated energy prices ushered in the $4 per gallon gasoline era in the United States.

Unlike the $3 per gallon threshold, Dawson said $4 gasoline marked the start of a new period of economic sluggish for the U.S., as consumers' decreased disposable income forced them to cut back retail spending, affecting everything from dinners out, to entertainment and vacations, to which type of car they'll purchase next. Dawson expects $4 gasoline alone to shave 0.6-0.9 percentage points off 2008 U.S. GDP.

"Given that the economy was barely growing below this latest $1 increase in gasoline, most likely U.S. GDP will turn negative in Q2 and Q3 [2008], and that's a tough environment for stocks," Dawson said.