Stocks just had one of the worst months since the 1930s and economic data was ugly, too.  Real gross domestic product was revised down sharply for the fourth quarter of 2008, home sales fell further, business investment was weak and unemployment claims jumped again. 

First quarter GDP, so far, doesn’t look any better than it did in the fourth quarter.  Yet, there are signs that the primary cause of the recession – a sudden and sharp decline in the velocity of money – is starting to reverse, so that it will eventually pave the way for recovery later this year.

Usually stocks move up before a recovery begins, so what’s going on?  Are stocks saying that there is no recovery on the horizon or are they saying something else?  We hear two common explanations.  First, some say the Fed’s monetary policy is too tight.  And second, policies coming from Washington, D.C., are certainly damaging to the economy.

So where do we go from here?  Is the market in a free-fall that will never end?  We don’t think so.  With money easy and velocity stabilizing, recent declines in stocks are most likely a reaction to intrusive fiscal policy.  The good news is that these policies, while negative, are unlikely to harm the economy dramatically until 2010 or later.  With the potential for a change in mark-to-market accounting rising and easy money in place, we are still looking for a sharp rally in stocks this year, just like the U.S. experienced in 1975-1976 despite stagflationary policy mistakes.

From Brian Wesbury and Bob Stein at Forbes.com

Related posts:

1. Eventually Stocks Will Begin Trading on Positive Fundamentals
2. Economic Recovery, Government Stimulus, and the Conservatives’ Mistake
3. Where We Go From Here
4. Why the Recession Will Likely End Soon
5. Keynesianism Is The Wrong Model To Make Investment and Economic Decisions

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