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With No Bottom Seen in Housing, Market Recovery Delayed

Tracking the performances of the S&P 500 and the S&P Retail indices in the last two recessions indicated when the market upturn began in hindsight...

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Tracking the performances of the S&P 500 and the S&P Retail indices in the last two recessions indicated when the market upturn began in hindsight, but the lack of evidence that housing has yet hit a bottom in the current downturn suggests the stock market might not be rebounding anytime soon.

While the recent stock market upswing may have some investors hoping for an economic turnaround, several economists and analysts say the United States is in for a long, bumpy landing.

A recession is typically defined as two consecutive quarters of falling real gross domestic product, or GDP. According to HSBC economists Ian Morris and Stephen King, a recession can include sustained periods in which unemployment is rising and GDP is trending below potential growth. Using this analysis, the economists conclude that a recession started in the first quarter of 2007.

"What's more important is the likely length of any adjustment. Evidence from other countries suggests that even with significant interest rate cuts and looser fiscal policy, a liquidity hangover can be long and drawn out," the economists wrote in a research note.

They describe the U.S. economy as a "W-shaped story," not the quick "in and out Vs that investors hope for."

"Periodic bouts of false recovery will give way to disappointment in 2008 and 2009 before the flicker of a more sustained expansion emerges in 2010," the economists predicted.

HSBC cut GDP forecasts to 1.5 percent in 2008 and to 1.2 percent in 2009. Unemployment is believed to be heading sharply higher, and the Federal Funds Rate may eventually come down to 1 percent, the economists concluded.

According to Roxanne Meyer, retail analyst at Oppenheimer, The Oppenheimer Retail Softlines Index trailed the S&P 500 by 26 percent on Oct. 12, 1990, five months prior to the declared end of the 1990-1991 recession. The same index traded 35 percent below the S&P 500 on Sept. 21, 2001, two months before the 2000-2001 recessionary period was declared over. The index recovered into 2002, but retreated to near its earlier bottom in October before forming a more lasting recovery.

"This could tell us two things. First, if we head into a recessionary period, it could be a long way down from here, with the 'first' bottom likely to be close in timing with the declared end of the recession. Second, it could take even longer before a sustained recovery occurs," Meyer said.
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