Yes – that's right. I absolutely believe we will see a double recovery, and not only have I been saying it out loud, now I am putting it in writing.
Yes – that's right. I absolutely believe we will see a double recovery, and not only have I been saying it out loud, now I am putting it in writing. I was sitting at my desk after watching and listening to the financial news when I noticed the headline that Madonna was going to be performing at the Super Bowl. I remember when I opened my own business in 1989, Madonna was a controversial, mega-pop star who was unstoppable and on top of the world. Now here she is in 2012, 23 years later, performing at the country's biggest sporting event. When I watched Madonna's energetic performance on Super Bowl Sunday, she reminded me of the U.S. economy: We might falter, we might be controversial (bailouts and scandals), but when we put our minds to something, we are truly unstoppable. The U.S. continues to be, in my opinion, the single best place in the world to invest.
The past three years have certainly had their low points, but they have also seen a number of amazing high points, and I believe those highs have been adding up to a true recovery in the financial markets. Since the lows of March 2009 the markets have rallied back, with the Dow Jones Industrial Average returning over 110% (through Feb. 6th). I am not an analyst or an economist, I am an economic realist. Using common sense as my guide I continue to see signs of recovery.
Americans are adaptable and resilient. We saw our home values fall, our 401Ks shrink and many lost jobs. We witnessed huge bailouts, bank failures and financial scandals. We continue to see deadlock from our leaders in Washington while we wait for clarity on taxes, healthcare and regulation. But Americans keep pulling themselves up by their bootstraps and persevering. We cut back our personal budgets at home, we shopped at lower-end retailers, we fixed our own cars, mowed our own lawns and we even took second jobs just to make ends meet.
And U.S. Corporations did exactly the same things. They trimmed costs, closed unprofitable business lines, saved bundles of cash and now many corporations are bringing their manufacturing back to the U.S. And by doing all of these things, I believe we have brought our nation back from the brink of depression, and are instead experiencing a slow, but steady, recovery.
That is the first leg of the double recovery. In my opinion, the second leg of the double recovery is on the near horizon, and it will be driven by investor confidence. Every fundamental you can measure for the financial markets—price–to-book ratio, price-to-earnings ratio, price-to-sales ratio, and even price-to-cash-flow—are all at historical lows. Corporate earnings are at an all-time high. I believe that these fundamentals provide substantial evidence that there is strong value in the marketplace today. I would argue that there are still a few missing ingredients for recovery: job creation, home values and consumer confidence.
What I see happening right now is a slow but deliberate return of confidence among both consumers and businesses. And I firmly believe that once businesses and consumers return to the marketplace, this double recovery will begin in earnest. I believe consumer confidence will lead investors back to the equity markets, and that will bolster the confidence of our business leaders to begin spending their cash, expanding and hiring again. The housing market may take a bit longer to enter this double recovery, but I have no doubt the other ingredients are going to drive growth.
Reporters, investment professionals and investors ask me all the time, “What about the global volatility and debt?” I understand that markets worldwide have experienced increased volatility from a variety of things: a slow economic recovery in developed nations, concerns over sovereign debt in Europe and an uncertain regulatory environment. While current global market events can't be ignored, I do not believe any of this can stop our double recovery here in the U.S. There will always be significant hurdles for the economy to work through, but I believe many of the underlying fundamentals are much stronger today than they were during the financial crisis three years ago. And I truly believe we are on the brink of a sustained, steady double recovery in our economy and in the stock market. If Madonna can do it, so can we!
Neil Hennessy is the president and CIO of Hennessy Funds.
