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Stock Market Could Rally "Quickly If There Is a Soft Landing," Says ECRI's Achuthan

Posted Sep 02, 2010 08:00am EDT by Peter Gorenstein in Investing, Recession
Related: ^dji, ^gspc, spy, dia, ^ixic, qqqq

Investors felt better about the economy on Wednesday after the August ISM manufacturing index improved compared with July. Forecasters were looking for a decline, and when that didn't happen, stocks took off.

After so many disappointing data points this summer, the good news was met with a broad market rally. The Nasdaq and S&P 500 rose nearly 3% on Wednesday, and the Dow jumped more than 2.5%.

Still, one economic report does not make an economy or a bull market. Investors are looking to Friday's unemployment report for more clues as to the direction of the economy.

So was the plunge in stocks in August an indicator of recession or simply a misreading of the situation? Nobel prize-winning economist Paul Samuelson famously said, "the stock market has forecast nine of the last five recessions."

"The question of a recession or soft landing has not been decided yet," says Economic Cycle Research Institute's Lakshman Achuthan. As discussed HERE Achuthan thinks there's a greater than 50% chance of recession.

Recession or not, the stock market was reacting to the slowing economic growth rate, says Achuthan. "The stock market is really keyed into the pace of economic growth," he says.

If we are indeed heading for recession, then Wednesday's rally was just a blip in a prolonged bear market to come.

But, if the U.S. is able to avoid a double-dip, "the market should move pretty quickly if there is a soft landing," Achuthan tells Henry. Unfortunately for investors, if that's the case, there isn't much time to prepare. Achuthan says the move will be sudden and will come without much warning.

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