Investment Outlook: No to Double-Dip

By Bill Stone of PNC Wealth Management

It is an intensely hot day, all things on land and sea being merely variations and shapes of flame, wonderful to look upon but not wholly good to be amongst. -- William Vaughn Moody, American poet and playwright

As the summer weather here on the East Coast has heated up, the global stock markets have continued to melt under the bright sun. As much as investors enjoyed the S&P 500's first-quarter gain of 5.39%, all that and more fell to the wayside as the index slumped, down 11.43% in the second quarter. This has left investors wondering if the market has another 2008-style rout in store.

Market Focus and Our Economic View

In our view the primary cause of continued market weakness is concern that various issues, including European sovereign debt, a China slowdown, and a recent soft patch in U.S. economic data, will cause another global economic downturn so soon after the last. In other words, fear of a double-dip recession.

As we noted, the recent spate of U.S. economic data reporting below market expectations seems to have added to the nervousness. For example, last Friday when June employment data were released, headline job losses of 125,000 broke a streak of five straight gains. A bit of nuance is helpful here, because the recent job numbers were aided by census hiring, which is now reversing.

When one looks at private hiring, the six-month streak continues with 83,000 new jobs in June. Private hiring was less than most would have preferred and average weekly hours also declined, but this indicates to us a soft patch more symptomatic of an economy still transitioning out of the Great Recession than an impending double-dip recession.

It is worth noting that when one uses the National Bureau of Economic Research recession dating double-dip recessions are historically pretty rare. If we define a double-dip as a recession within 12 months or less of another, then there would have been only three in the United States since 1854 -- January 1910 to January 1912 and January 1913 to December 1914; August 1918 to March 1919 and January 1920 to July 1921; January 1980 to July 1980 and July 1981 to November 1982.

Our forecast remains that there will be no double-dip in the United States but that the economic data are consistent with our long-held view regarding a half-speed economic recovery.

Market Drivers

This holiday-shortened week the U.S. economic calendar is very light. With this mind, here are a few factors that could provide a positive catalyst:

oversold stocks;

bearish market sentiment;

second-quarter earnings;

European bank stress tests; and

valuations.