The June swoon has punished the market to the point where stocks have pretty much given up all of their 2011 gains and then some. But if the economy has merely hit a "soft patch" and not heading for a double-dip, as many say, a second-half rebound will serve long-term investors better than those who've bailed out.
After Wednesday's dramatic selloff two of the three major averages are in the red for 2011 and the Dow -- which lost 178 points yesterday -- is barely above breakeven. Mounting anxiety over a global economic slowdown or even outright contraction is to blame. Federal Reserve Chairman Ben Bernanke maintains that the economy's current weakness is "transitory," and partly attributable to the disaster in Japan.
True, blaming Japan for all the world's economic and market ills right now is too easy and simplistic. (Jitters in the euro zone, the U.S. debt-ceiling fight and the expiration of the Fed's second round of money printing, among other factors, weigh on traders' feverish brains too.)
But plenty of economists and market watchers are telling their clients the same thing as the Fed chief: Much of the lousy economic data, including recent readings on retail sales, manufacturing and inflation, have roots in the catastrophe in Japan -- and the worst of those effects are behind us.
Ed Yardeni, president and chief investment strategist at Yardeni Research, writes there "is mounting evidence that Japan's devastating earthquake and tsunami on March 11 caused the global soft patch."
Japanese exports plunged 14 percent during March and April, Yardeni notes, their lowest pace since February 2010. Prior to the disaster Japan's total exports were so strong they almost matched an all-time record high set in 2008 (before the great global collapse began.)
David Resler, chief economist at Nomura, describes the economic expansion as having hit a "pot-hole," with plenty of data confirming that Japan's earthquake and tsunami took a toll on U.S. growth. However, "both anecdotal evidence and hard data seem to validate hopes that the slowdown will prove transitory," Resler tells clients.
For example, the auto industry was particularly hard-hit by the catastrophe but, importantly, there were almost no job losses associated with it. Furthermore, a sharp rebound should be in store soon, the economist writes.
"When auto parts production returns to 'normal' -- perhaps as early as late this month judging from reports from Japan -- U.S.-manufacturing facilities will quickly ramp up vehicle production and increase shipments to replenish depleted stocks and to fill demand that has gone unrequited in April and May," Resler tells clients in a recent report.
David Greenlaw, Morgan Stanley's chief U.S. fixed income economist, also holds the view that the economy is in a temporary soft patch. He sees stronger economic growth in the second half of the year, like Resler, helped by a spike in vehicle production in order to replenish inventories.
"Indeed, we estimate that a rise in motor vehicle output aimed at rebuilding depressed inventories will add about 1.5 [percentage points] to [third-quarter] GDP," Greenlaw tells clients.
Liz Ann Sonders, chief investment strategist at Charles Schwab, also holds the opinion that the economy has hit a "soft patch" partly attributable to the disaster in Japan. She likewise predicts stronger performance in the second half of the year.
"Economic data has deteriorated to the point that talk of a 'double dip' recession has returned," Sonders tells clients in recent note. "We think the risk of another recession is low as most indicators remain well in expansion territory. Several factors are contributing to a soft patch, but we believe a rebound is likely in the latter part of 2011."
If that second-half rebound does indeed transpire, investors with long horizons will end up feeling just fine about the June swoon. (Stocks spent the summer of 2010 in the doldrums too, remember, before going back on huge run.) By making regular contributions to your 401(k) or dollar-cost-averaging into your portfolio, you'll be loading up on more shares at cheaper prices during the swoon. You'll also be socking away higher yields on your dividend-paying stocks. In other words, buying low.