The situation is continuing to evolve. Investors should monitor labor market developments closely. This may be the key to the real economy going forward. Financial market conditions should also be watched carefully. If banks continue to tighten lending standards, it is imperative that the capital markets function normally and that liquidity spreads continue to return to recent historic averages.
A housing market stabilization would arguably go a long way toward helping sentiment improve. No less than the maestro himself, Alan Greenspan, suggested in late January that “we may be close to the point where actual sales levels are starting to bottom” and the “sooner we get to stabilization” of the housing sector the better for the overall economy. He also recognized recession risk had increased, but he located the economy “clearly at the edge.” If this assessment is accurate, then policy developments may hold the key.
Given the monetary and fiscal stimulus in the pipeline and the fact that real interest rates and inventory levels are already quite low, there still seems to be good reason to expect the economic slow down to be short and shallow rather than long and deep.
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