'You Haven't Seen Anything Yet' as Stocks Sink, Economies Falter

(Adds economic reports from today showing few signs of improvement.)

BOSTON ( TheStreet) -- October has a history of being an especially cruel month for investors. And if the stock market's disastrous performance and volatility in the third quarter was a prelude, it may well be again.

Economists are divided on whether the U.S. economy is about to fall into a recession and drag the equity market and Americans' 401(k)'s down with it. That's a scary prospect because the benchmark S&P 500 Index is nearing a bear market, having declined almost 20% since late April. Other asset classes such as commodities, oil and real estate also have fallen.

Economists' latest prognostications will make your head spin, but they agree on one thing: A resolution of the Eurozone's sovereign debt crisis this month would go a long way toward getting the world's economy and stock markets back on track.

On the optimistic side, Deutsche Bank ( DB) said Tuesday that "we believe the U.S. will avoid another downturn because the U.S. corporate sector is extremely healthy, (with) profits per private worker at a record-high reading.

"In the past, the U.S. economy has never entered a downturn when profits were so high and companies were so lean," Deutsche Bank said. "In fact, we do not see many of the imbalances, such as a bloated corporate sector, that typically precede a recession."

Goldman Sachs ( GS) analysts came out with a similar, but tempered, view on Friday, saying "our base-case forecast continues to be that the U.S. economy will avoid a recession, though the risks are high and rising."

The firm's economic analyst Zach Pandl wrote that "an average-size economic shock would lead to a relatively shallow recession today. We see the main downside scenario as a shallow recession followed by a slow recovery."

Ironically, the reason that it would be "shallow" is that things are so bad now, they don't have far to fall. "Low activity in cyclical sectors of the economy is likely a major positive: residential investment, vehicle sales and spending on business structures are extremely low, and therefore less vulnerable to steep declines," Pandl wrote.

But on Tuesday, Goldman's London office cut its forecast for global growth in 2012, to 3.5% from 4.2%, and said it now expects the Eurozone to sink into a "mild" recession in the fourth quarter.

Goldman cautioned that "the uncertainty around these forecasts is substantial, largely hinging on the progress of credible solutions to the Eurozone's funding problems."

On the other side of the aisle, the highly respected Economic Cycle Research Institute (ECRI) said Friday that "the U.S. economy is indeed tipping into a new recession. And there's nothing that policy makers can do to head it off."

The economic think tank said its "recession call isn't based on just one or two leading indexes, but on dozens of specialized leading indexes" and that "the most reliable forward-looking indicators are now collectively behaving as they did on the cusp of full-blown recessions, not 'soft landings.' "

ECRI, which correctly ruled out a double-dip recession last year while others said it was imminent, concludes its comments with the dire warning: "If you think this is a bad economy, you haven't seen anything yet. And that has profound implications for both Main Street and Wall Street."

Economic reports released Wednesday show the economy showed no improvement last month. The Institute for Supply Management said U.S. service industries expanded at a slower pace than in August, and the group's employment gauge recorded a contraction, the first since August 2010. ADP Employer Services said companies hired 91,000 workers in September, about the same as in the previous month.

Despite the evidence of a continued slowdown, ECRI has its naysayers. Deutsche Bank analysts said investors should take that view with a grain of salt, because "we have found that the ECRI (composite index) is dominated by the behavior of the S&P 500, and the correlation coefficient between the two series is a staggering 90%. Essentially, as the S&P 500 goes, so goes the ECRI."

Deutsche Bank also notes that "there was a similar ECRI scare in July-August 2010."

All that said, it's worth noting that the great market crashes of 1929 and 1987 came in October, as did two of the biggest market declines of 2008.

And it was but three years ago, on Oct. 11, 2008, that the head of the International Monetary Fund warned that the world's financial system was teetering on the "brink of systemic meltdown."

That was followed by steady declines before the S&P 500 bottomed on March 9, 2009, when it hit a 12 1/2-year low.

Eight months later, by November, it had gained 63% in what was one of the biggest stock-market rallies since the Great Depression.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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