Is the economy springing to life?

By Tim Suffish CFA, CPA Vice President, St. Germain Investments If you've watched the financial news networks lately, you might think that your TV had mistakenly been switched over to the gardening channel. How could you not, with all the talk about "green shoots," "crocus blossoms," and "mustard seeds." These references, however, are not to the signs of Spring, but to the signs of life in the recent economic data. We are now 18 months into the recession. the longest post-WWII recession we have seen. If the economy is in fact sprouting some of these "green shoots" and the first signs of recovery are starting to emerge, then the upcoming stimulus spending from the federal government has the potential to really get things going. Is this a good thing? Well, yes and no. More money flowing through our economy will certainly have an impact on the numbers .spending will increase, and this will flow through to corporate profits. Many important indicators, like consumer confidence, will go up as well. However, spending of this magnitude, the likes of which we have never seen before, will lead to inflation. A promising past two months Looking across markets, sectors and asset classes, we've seen a tremendous rally over the past two months, based on two things. First, global asset markets had sold off dramatically and got to levels where buyers saw real value, and thus the incentive to buy. Second, we are far enough through the current recession that investors are now willing to look forward to the eventual recovery, and buy stock in anticipation of a rebounding economy. The data right now is not good, but it is certainly less bad. Is this the view through rose colored glasses? It is to some extent, but an objective view of past recessions will show that the data follows a predictable path; bad, not as bad, good. Many leading indicators we follow are poking higher in recent weeks. We're not quite ready to point and say "a-ha, the recession is over!" but we're paying attention to these positive signs and patiently waiting for confirmation the economy is making progress toward healing and growing. The cash conundrum One oft-cited factor worth mentioning is the cash "on the sidelines." Cash that is currently in money market accounts, savings accounts, and short term CDs is at a record high. As a percentage of the market capitalization, or "worth" of the US stock market, this cash is now equivalent to 90 percent of the total value (Wilshire 5000). Looking back at previous market low points when investors fled risky assets for the safety of cash, this ratio peaked at about 60 percent. To see this now at 90 percent is really "off the charts" and has the potential to set up stock prices for a significant tail wind for years to come. This is only one indicator, but it is one to watch. The Federal Reserve has lowered short term interest rates to zero, which means that this cash is not earning. It (the cash) will become restless. and it eventually find its way into our economy and our market. And the impact will be significant. For now though, we'll watch the data. Green shoots are sprouting. Column provided to PRIME by: St. Germain Investment Management; 1500 Main Street, Springfield, MA; Phone is 413-733-5111 or 1-800443-7624; web site:www.stgermaininvestments.com