Down Only 27%? We'll Take It!
Enter the Era of Low Expectations
Friday, February 6, 2009; Page D01
Has "not as bad as we thought it would be" become the new "good"?
Has the economy really come to that?
With the Dow Jones industrial average down 8 percent this year, with the national unemployment rate almost certain to rise when it comes out today, and with exports grinding to a halt in Japan and elsewhere, the answer is: Yes, it has come to that. Any sliver of not-terrible news looks like a silver lining. We'll take it.
Consider Wednesday's quarterly earnings report from technology giant Cisco Systems, which builds much of the Internet's plumbing. The company announced profits that were down 27 percent over the corresponding period last year and predicted that sales would sink 15 to 20 percent in the next quarter.
In response, shares of Cisco climbed about 3 percent; the news was not as bad as expected. Some analysts suggested that Cisco's "turnaround" would lead tech stocks back.
The not-so-bad phenomenon extends beyond earnings reports. At the end of last month, the government reported that gross domestic product in the fourth quarter fell at a 3.8 percent annual rate -- its worst performance in nearly three decades. But economists expected it to be down more than 5 percent. A couple of days later, the government report that personal income fell 0.2 percent -- the third straight monthly decline -- but a 0.4 percent drop had been predicted.
The same thinking applied to yesterday's terrible-for-any-other-time retail news. Sales were dismal, but not as dismal as the market expected, which is part of the reason the Dow gained 1.3 percent yesterday, closing up more than 100 points.
"I think it's human instinct to be optimistic," Art Hogan, managing director at Jefferies & Co., said yesterday. "And it's natural if you've spent the entirety of last year watching the market go down 40 percent. It's kind of like that joke that ran around at bonus time: Flat is the new up. If you can only get flat compensation on a year-over-year basis, that's the new up."
Call it the era of diminished expectations.
Implicit in the grasp for good news is this: People need to believe that things are going to get better. At this point, the United States has been in a recession for 14 months. Americans want to know whether it's going to be what economists call a "U-shaped" recession, meaning we'll hit a bottom and the good times will return, or whether it's going to be what they call an "L-shaped" recession, meaning we'd better get used to a Dow stuck at 8,000. The latter would mean the era of 20 percent annual appreciation on your home's value is over for good, and, if we're lucky, the economy will again -- someday -- return to the modest prosperity marked by 8 percent annual gains in your stock portfolio.
So we look for signs.