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Is an Economic Recovery in the Cards for 2009?

According to the April 21, 2009 Bloomberg article entitled “Fed’s Kohn Says Economy May Stabilize, Start Recovery This Year,” Federal Reserve Vice Chairman Donald Kohn said recently during a speech at the University of Delaware that “…the U.S. economy may stabilize in the second half and begin a slow rebound after a strengthening of fragile financial markets.” Kohn went on further to say that “consumer spending appears to have steadied and the housing contraction has slowed.”

These viewpoints are similar to those that we have been expressing at Hennion & Walsh as we believe that the stock market recovery will begin before the economic recovery does and that economic growth will likely not return to the United States until the end of year. Following this train of thought, if the recession does officially end by the end of 2009, this bodes well for the commencement of a stock market recovery at some point during the third quarter. The basis for this rationale can be found in a Wachovia Securities research report entitled “Economic Recessions and the Stock Market.” This report examined the 10 official recessions since World War II and concluded that, on average, the S&P 500 Index-* bottomed approximately 4.5 months before the recession end date.

However, there is even more room for optimism on the basis of Vice Chairman Kohn’s comments. To start, he indicated that consumer spending appears to have steadied. Consumer spending is critical for the economy to grow out of its current recession as consumer spending accounts for over 70% of Gross Domestic Product (“GDP”). While a rise in consumer spending would be terrific news, stabilization is encouraging in its own right.

Secondly, the statement that the housing contraction has now slowed is promising as housing has been at the core of the current credit crisis. Similar to consumer spending, a national housing recovery would be an even more positive sign pointing towards an economic recovery, but suggesting that the housing market is now at, or near, a bottom is also heartening and should provide for renewed confidence amongst lenders, borrowers and existing homeowners.

While we are not out of the woods yet, and there are many known, and unknown, factors that could hamper recovery efforts, we, at Hennion & Walsh, are starting to see some much needed and greatly desired light peeking through the trees.

*-The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. You cannot invest directly in an index.