Yes, that’s right. I absolutely believe we will see a double recovery, and not only have I been saying it out loud, now I’m putting it in writing. I was sitting at my desk after watching and listening to the financial news when I noticed the headline that Madonna was going to be performing at the Super Bowl. I remember when I opened my own business in 1989, Madonna was a controversial, mega pop star, unstoppable and on top of the world, and here she is in 2012, 23 years later, performing at the country’s biggest sporting event. When I watched Madonna’s energetic performance on Super Bowl Sunday, she reminded me of the U.S. economy. We might falter, we might be controversial (bailouts and scandals), but when we put our minds to something, we’re truly unstoppable. The United States continues to be, in my opinion, the single best place in the world to invest.
The past three years have certainly had their low points, but they’ve also seen a number of amazing high points, and I believe those highs have been adding up to a true recovery in the financial markets. Since the crash of March 2009, the markets have rallied back, with the Dow Jones Industrial Average returning more than 150 percent (through February 28). I’m not an analyst or an economist; I’m an economic realist. Using common sense as my guide, I continue to see signs of recovery. Americans are adaptable and resilient. We saw our home values fall and our 401Ks shrink; many lost jobs. We witnessed huge bailouts, bank failures and financial scandals. We continue to see deadlock from our leaders in Washington, D.C., while we wait for clarity on taxes, health care and regulation. But Americans keep pulling themselves up by their bootstraps and persevering. We cut back our personal budgets at home, we shopped at lower-end retailers, we fixed our own cars, mowed our own lawns and we even took second jobs just to make ends meet. And U.S. corporations did exactly the same things. They trimmed costs, closed unprofitable business lines, saved bundles of cash and, now, many corporations are bringing their manufacturing back to the United States.
Companies throughout the United States also raised or initiated dividends, bought back their corporate stock and made strategic acquisitions. And by doing all of these things, I believe we’ve brought our nation back from the brink of depression and are instead experiencing a slow, but steady, recovery.
That’s the first leg of the double recovery. In my opinion, the second leg is on the near horizon, and it will be driven by investor confidence. Every fundamental you can measure for the financial markets—price–to-book ratio, price-to-earnings ratio, price-to-sales ratio, and even price-to-cash flow—are all at historical lows. Corporations have been performing well and U.S. corporate earnings before tax are at an all-time high. I believe these fundamentals provide substantial evidence that there’s strong value in the marketplace today. I’d argue that there are still a few missing ingredients for recovery: job creation, home values and consumer confidence.
What I see happening right now is a slow but deliberate return of confidence among both consumers and businesses. And I firmly believe that once business and the consumer return to the marketplace, this double recovery will begin in earnest. I believe consumer confidence will lead investors back to the equity markets, and that will bolster the confidence of our business leaders to begin spending their cash, expanding and hiring again. The housing market may take a bit longer to enter this double recovery, but I have no doubt the other ingredients are going to drive growth.
Reporters, investment professionals and investors ask me all the time, “What about the global volatility and debt?” I understand that markets worldwide have experienced increased volatility from a variety of things: a slow economic recovery in developed nations, concerns over sovereign debt in Europe and an uncertain regulatory environment. While current global market events can’t be ignored, I don’t believe any of this can stop our double recovery here in the United States. The other question I’m constantly asked is, “Will higher gas prices stall the current recovery?” I don’t think anyone can predict the movements in the price of oil, and I know that this time of year, everyone is asking what the price of gas will be during the summer. But I don’t believe fluctuations in oil prices can undermine the fact that basic market fundamentals remain strong and quite promising. And we have evidence of just that, as the Dow Jones Industrial Average closed above 13,000 this past February, for the first time since 2008.
As we move into the thick of the next political election, I’m hopeful the presidential candidates will focus on the economy and jobs as the number one priorities and not be distracted by less important issues. I believe our elected officials in Washington, D.C., can help the timing of this recovery by providing clarity that America’s business leaders are so desperately waiting for. The sooner companies know for certain what to expect with taxes, health care costs and regulation, the sooner they’ll be able to move forward with hiring and investing in their businesses.
There will always be significant hurdles for our nation and our economy to work through, but I believe many of the underlying fundamentals are much stronger today than they were during the financial crisis three years ago. And I truly believe we’re on the brink of a sustained, steady, double recovery in our economy and in the stock market. If Madonna can do it, so can we!
Neil Hennessy is president/CIO of Hennessy Funds. Opinions expressed are his and are subject to change, are not guaranteed and should not be considered investment advice. You can reach him at (415) 899-1155 or neil@hennessyfunds.com.
