Russell Investments' CIO tells advisors that data is 'not consistent' with a recession

Brooke’s Note: Maybe we had these isolated, rained-on Seattle-ites wrong after all. Where the rest of the practitioners of the dismal science are seeing gloom,Russell Investments is seeing rays of light in the economy. That’s despite the city’s late start to summer and the early onset of autumn. Here’s what they had to say in a conference call with financial advisors. There were 368 people on the call, including Russell associates, advisors and investors. About 275 were advisors and investors.

Countering an all-but unanimous chorus of dire predictions about the fate of U.S. economy, executives at Russell Investments offered hope on Tuesday, saying they don’t think conditions are ripe for another recession.

Since Standard & Poor’s downgraded the U.S. government debt to a double A rating a week and a half ago, talk of a double-dip recession has been front and center with many constituencies – including David Rosenberg, the Gluskin Sheff economist (formerly of Merrill Lynch) and Yale’s Robert Shiller – rating the chances at about 50-50.

But Russell Investments estimates there’s just a 20% chance of another recession. The economy is still vulnerable, the firm’s economists say, but positive signs, such as strong earnings results, are outweighing the possibility of a recession right now. Thee events occur periodically. See: A glimpse inside Russell’s advisor event in Seattle.

“The recovery has continued but it has been more mediocre than we thought,” says Erik Ristuben, chief investment officer of client strategies, who spoke to investors and advisors on the conference call. “You can almost talk yourself into a recession, but we don’t think we’ll slip into a recession.”

Also on the call were Mark Eibel, director of Client Investment Strategies and Phill Rogerson, managing director of Consulting and Client Services.

Bright spots

Russell had anticipated growth of 3% this year, but so far the economy has grown at a snail’s pace of 1.3% in the second quarter.

But amid the grim unemployment statistics and companies’ continued refusal to start hiring, the analysts say there are some bright spots.

On Tuesday, the Federal Reserve reported that industrial input – the production of goods that go into the production of other goods – rose 0.9% in July, building on an 0.4% gain in June, higher than many experts had expected. In addition, motor vehicle production surged 5.2% in July after falling 0.9% in June.

Ristuben points out that strong second-quarter company earnings along with a jump in retail sales are helping to boost the economy. Last week, the Commerce Department announced that retail sales rose a seasonally adjusted 0.5% in July, the largest increase since April.

“I’m not telling you that the all-clear has sounded on the beach but this information is not consistent with a recession,” Ristuben says. “The market is beginning to believe we’re going to skirt the recession.”

Blame it on August

It’s not unusual to have strong sell-offs in August when the news cycle typically slows down and bad news tends to get more attention, says Eibel.

Mark Eibel: There has been good
news otherwise the market would have
sold off in more dramatic fashion
earlier than it did.

In fact, a year ago, on Aug. 11, 2010, the Dow plunged 265 points, losing 2.5% of its value.

The Dow Jones Industrial Average dropped 76.97 points on Tuesday but that was mild compared to last week’s wild swings. The Dow has lost some 10% since its April 29 high.

“While this sell-off is worse than most, it’s not that far off from the others,” Eibel says. “And most of these seem to be in August. There has been good news otherwise the market would have sold off in more dramatic fashion earlier than it did.”

Managers on the defensive

Additionally, managers handled this round of market volatility better than the last one because many continued the defensive strategies they adopted after the 2008 meltdown.

Many managers are still under-weight in Treasuries because they don’t want yields of 2% to 2 1/2% for a 10-year-period, Eibel says.

Port in a storm

Ristuben says that last week’s statement from the Federal Reserve saying that it would keep interest rates low until mid-2013 has been a huge help, even though it wasn’t the cure-all everyone was hoping for.

“What markets dislike is not getting any news,” he says. “Uncertainty is the worst thing. Putting a data point out there is one reason the markets rallied because it took the uncertainty out.”