Uncertain Policy Weighs on Stocks

Despite a nice rally on Friday after Fed Chief Ben Bernanke assured us that he can save the U.S. economy if it deteriorates further, some economists are still forecasting a "double-dip" of recession.

Now, after what we've been through over the past couple of years, it's easy to believe that the sky is still falling. After all, unemployment is still high, the housing market is in terrible shape, debt at the Federal and the state level, especially, is at record highs and the banks still have too many bad loans on their books.

And to make matters worse, none of these toxic conditions appear to be improving. In fact, they seem to be getting worse. We are still losing around 500,000 jobs a month. Also, there's a year's worth of housing inventory. And if you include the "shadow" inventory of homes that seem likely hit the market, it's more like two years.

Yes, it's bleak. But do these conditions mean that economic activity in the U.S. is about to shrink below levels that were achieved last year?

Looking back through history, you'll find that recessions are always preceded by some kind of shock. It may be some anomalous event, like 9/11 or the oil embargo from the early 1970s that pushes economic activity below the breakeven line. Or it may be the sudden re-allocation of poorly invested capital tat jolts the economy, like when the housing or Internet bubbles crashed or the stock market crash in 1929.

On very rare occasions, recessions (or depressions) can get kicked off by policy decisions. The moves to tighten lending standards and adopt protectionist rules after the 1929 stock market crash have been widely credited with making a bad situation worse.

Right now, given the frustratingly slow pace of economic growth, it seems to me that more and more Americans are advocating policy changes that could have disastrous consequences.

Some believe that we must adopt austerity measures to get a grip on potential inflation and get our national debt in order. Others say it's time to reverse the tax cuts that George Bush implemented. Raise interest rates, dismantle the Fed, kill free trade agreements: there is no shortage of blame for our current situation and ideas to return America to the glory days.

Unfortunately, most of them, if enacted, are exactly the kind of policy decision that will inhibit growth rather than foster it.

The only way out of this mess is by investing in future growth, like alternative energy, public transportation or even biotech.

Here's an interesting read from CNN Money on the subject

This is a big week for economic data. We get the Case-Schiller home price index and consumer confidence tomorrow. The it's the ISM Index and auto sales on Wednesday. Thursday brings us productivity, labor costs, factory order and pending home sales. Then Friday we get the Big One: nonfarm payrolls.

Right now, expectations are that private companies have added 44,000 workers. And if that number turns out to be right, well, I can't see how this would be good. That's simply a pathetic hiring rate. It makes me wonder if the estimates for private payrolls is deliberately lowballed.

Expectations for economic data are very low right now. I can only hope that we see some upside surprises.

On Friday, we saw such a thing play out with Intel (Nasdaq:INTC). If you missed it, Intel announced that 3Q revenue would be in the $11 billion range, below the previously announced range of $11.2-$12 billion. But Intel's stock price finished higher on Friday.

The reason is simple: analysts were expecting worse, and the clarity of Intel's forecast provided some certainty in this increasingly uncertain market.

What's interesting is that while some analysts have changed their rating on Intel (one went from "buy" to "hold"), the price target changes still call for plenty of upside. Targets in the $30 a share range now stand at $25-$28. The current stock price is right around $18, which implies a forward P/E of 9.

As much as anything else, this situation with Intel sums up the current market environment. Even with slowing growth, stocks appear cheap. And yet no one, not analysts or investors, is willing to get bullish.

Make no mistake it's uncertainty that's weighing on both the economy and the stock market. At this point, a little clarity will go a long way.