Confusion over economy reigns

Associated Press

NEW YORK

Small investors, take note: The smart money isn’t sure what to make of the economy, either.

Some market strategists say the recent drop in stock prices means the market is expecting a recession. Banks such as Goldman Sachs and others have lowered their year-end forecasts for the Standard & Poor’s 500 index. And Mark Zandi, the much-followed economist from Moody’s, says the chance that the economy will fall into another recession is 40 percent.

Which is to say, there’s also a better-than-even chance the U.S. economy will continue to grow, albeit slowly. That’s the case Federal Reserve Chairman Ben Bernanke and others have been making. This camp believes the economy will grow at a gradual pace now that gasoline prices have fallen, Japan’s factories are mostly back up to speed after the earthquake and tsunami, and the debt-ceiling debate is over for now.

All of these mismatched signs are leaving large investors in the lurch. Tack too hard to either safety or to risk, and there’s a chance that whatever the economy is doing will make their bets go sour. With so much hanging in the balance, some money managers say they don’t know what their next move will be: Buy stocks, load up on bonds, or simply hoard cash and wait for the dust to settle.

“We’re in a no man’s land,” says Robert Stein, the head of Astor Asset Management who is responsible for investments of $1.2 billion. “As a portfolio manager, I would like to have clarity. If it’s going to be a recession, we know what to do. If the economy is improving, that’s even better. But the economic data that’s been coming out is doing a great job of creating more question marks.”

Stein slashed his stock holdings by 50 percent in June after poor reports on economic indicators including consumer spending and new applications for unemployment benefits made him think the economy was stalling. He thought then that stocks would pick up during the last three months of the year. That’s when he planned to buy, but now he’s not so sure.

“We could buy again soon,” he says. “But it’s equally possible that we could reduce [our stock holdings] even more. We don’t see a tipping point either way yet.”

Stein is not alone. Confusion about the economy is one reason the stock market is the most volatile it’s been since the peak of the financial crisis in 2008.