Turning corners at high speed: Elvis Picardo

-- Elvis Picardo is a strategist and analyst with Global Securities in Vancouver, Canada. The opinions expressed are his own. --

By Elvis Picardo

VANCOUVER, Canada (Reuters.com) - Three months ago in this column, on the heels of the S&P 500's best 14-trading day performance since 1938, I had posed the question - have the markets turned the corner? With the index now up 38 percent from its 12-year low posted in March -- taking it into positive territory for the year -- the answer is an unequivocal "Yes."

But just as it is dangerous to drive around a corner at high speed, the velocity and momentum with which the S&P 500 has turned the corner, so to speak, has caused some concern about its future direction. Will it skid off into the red once again, or will it stay in the black?

In order to assess where we go from here, let's look at the prognostications that emanated this week from heavyweights such as the World Bank, Organization for Economic Cooperation and Development (OECD), and Federal Reserve. Their forecasts paint a somewhat mixed picture in terms of the outlook for the U.S. and global economy.

The World Bank had the most downbeat assessment of the three. In a report released on June 22, the World Bank noted that prospects for the recovery of the global economy are unusually uncertain, and the sharp decline in global GDP, industrial production and trade in the fourth quarter of 2008 and the first quarter of 2009 are without modern precedent. It said that although there are signs of stabilizing economic activity in the U.S., and of recovery in China, there are also "ample indicators" of a deepening and spreading recession. The World Bank forecast global GDP will contract by a record 2.9 percent this year, compared with its previous forecast for a 1.7 percent contraction. It expects the U.S. economy to contract by 3 percent this year, compared with its previous forecast for a 2.4 percent decline.

Coming as it did at a time of growing uneasiness about the sustainability of the recent rally, the gloomy prognosis led to the biggest one-day decline in two months for U.S. and European stocks. Fortunately, the damage was limited by remarks from the OECD and Fed on June 24, which while not really upbeat, did seem to indicate that the worst may be over.

The OECD revised growth projections upward for its 30 member nations for the first time in two years. That's not to say that the group expects a miraculous turnaround in economic activity. Its secretary general said that while OECD activity now appears to be reaching bottom, the ensuing recovery is likely to be weak and fragile for some time. The OECD now forecasts economic activity for the group as a whole will shrink 4.1 percent this year and grow 0.7 percent in 2010, compared with its March forecast for contractions of 4.3 percent and 0.1 percent respectively. It noted that signs have multiplied that the U.S. economy could bottom out in the second half of this year. As a result, the OECD now expects the U.S. economy to contract 2.8 percent this year and expand by 0.9 percent next year, compared with its previous forecast for a contraction of 4 percent in 2009 and flat growth in 2010.

As for the Fed, it said that information received since its previous meeting in April suggests that the pace of economic contraction in the U.S. is slowing. The Fed also said that economic activity is likely to remain weak for a time, but it anticipates that the combination of policy actions, fiscal/monetary stimulus, and market forces will contribute to a gradual resumption of growth. In other words, although Fed Chairman Ben Bernanke may be seeing "green shoots" in the U.S. economy, it may take quite some time for them to sprout into saplings.