AP Poll Says We are in a Recession

61% of the public believes the economy is in recession. Click here for the story. So, if the public knows, what does the stock market know? Isn't the stock market well ahead of broad public sentiment? A market strategist at Bear Stearns says, "Stocks don't do well because the economy or earnings are strong; they do well because the environment turns out better than expected." So, if the stock market and the general public know we are in recession, the challenge will be to figure out what's really anticipated, and therefore priced. This also means understanding the odds and resulting outcomes when things are better or worse than expected. Sounds like a challenging and dizzying game that gets repeated on a daily basis. Is there a Cray Supercomputer big and fast enough to help in our worthy cause?

Take retailers, for example. They are up more than 10% from their lows a few weeks ago. Is the consumer recession already priced, and a continued accommodative Fed will avert a real drawn out recession, and therefore, the worst is over for the retailers. Or, what if the drastic rate cuts in January caused short sellers to cover, only if momentarily, and the 10+% pop off the lows is temporary, as the economy nosedives into a severe recession, and it lasts longer than most expect? Things aren't so crystal clear now, are they?

All in all, the fact that sentiment surveys (including the one above from the AP) are so despondent is a good sign for the bulls. The one unique notion of this market is that you can't have universal agreement that the market is going to decline and it comes to fruition because when everyone is on one side of the ledger, the other outcome usually comes in. (Think New York Giants as heavy underdog, and the New England Patriots as huge favorites). The question is, what is unexpected? Think of the litany of reasons as to why we are in big trouble: economy is in recession, the sub prime mess is bad, the credit crunch will take time to mend, the dollar is weak and going to get weaker, the election will be a pitched battle, earnings will disappoint, budget deficits are going to get worse, etc etc...these stories have had more black ink spilt on them than necessary...so the astute investor knows they should spend their time seeking clues as to the surprise, the unexpected outcome, and its ramifications. That's what we'll be doing. Good luck and have a pleasant week.