A Slow, Painful Recovery Could Help Stocks

Posted by: Ben Steverman on May 14, 2009

According to many economists, investors and even policymakers like Federal Reserve chairman Ben Bernanke, the U.S. economy is in for a long, slow, painful recovery. A WSJ survey of economists suggests that a fully recovery could take at least three years.

The irony is that, for investors, this could actually be a good thing.

That’s what Bruce Bittles, chief investment strategist at R.W. Baird, tells me:

The best thing that could happen for the market [is if the economy remains in a mode of] very, very slow growth. Otherwise, the markets are going to be worried about inflation and interest rates rising.

The Fed and Treasury have flooded the financial system with liquidity. Under normal circumstances, all that cash sloshing around would cause inflation. It might also cause the Fed to hike interest rates too early, ending the recovery abruptly and spooking the stock market.

“It’s going to be a very slow, erratic recovery,” Bittles says. The economy might get a boost from government stimulus, the re-financing of homes and lower taxes, but, he adds, “that’s not going to be sustainable.”

A fitful, anemic recovery would allow the economy to heal, the stock market to get on its feet and corporate earnings to stabilize. But it won’t be pleasant for millions of unemployed Americans. And, the more precarious the recovery, the more likely the economy slips back into full-blown recession again.