There has been many recessions in the past. Stock investors are not fools especially American fund managers with their long experience. There is a price at which stocks take into account.
The Fed rate cuts will give the banks a profit boost to overcome the subprime losses by Q3-Q4. Even Buffett believes buying them now and holding for a few years will be profitable - he is not buying because he sees more value else where. Buffett has been buying healthcare. You can even emulate his moves in Singapore, with escalating healthcare cost you don't expect the profits of our healthcare providers to come down.
After the horrific ISM numbers on Monday that all but confirms recession, Wall Street has been "bumping around" at the bottom and if you look carefully, there is selective buying in the tech stocks & commodies sector. Investors are starting to differentiate instead of dumping across the board.
I believe investors will also start to differentiate among Asian countries. Malaysia I believe will continue to go up as it is a commodities producer & has oil. Thailand which missed out on the rally last year will move up as the govt stimulate the domestic economy. Singapore will have a harder time but certain sectors will do okay like construction.
Are Asian economies decoupled or coupled with the US economy? ...Of course in a globalised world there is no such thing as decoupling. The question to ask is how bad affected are Asian economies - India whose growth is infrastructure driven will be unaffected, China whose economy is too hot will cool to 9% growth a figure that its govt is comfortable with - of course the export companies there will suffer somewhat but those that cater to domestic demand will continue to do well. Right now one can debunk the recent "recoupling theory" - this theory that if US sneezes everyone get pnemonia. This recoupling effect as seen in stock market plunges is caused by risk avoidance and flight to quality is a market event rather than an economic event. If you wake up and the DOW fell 400pts, you will somehow get the urge to dump your Singapore stocks no matter what. As the US market fall heavily on recession fears, Asian markets will fall due to fear and panic. Once the US market discounted the US recession and move with less volatility, Asian markets will begin to differentiate and its moves will be linked more to the fundamentals of the companies on the index and the economy.
I believe the Malaysian & Thai market will begin to clearly outperform in the coming weeks. One still have to be very selective on the Singapore market.
As for the depth and length of the US economy one has to be very careful not to be too pessimistic or optimistic:
1. The US is in a serious situation given 70% of its economy is dependent on the consumer who "appears to be maxed out".
2. There are serious threats of an Asian Crisis type situation occuring due to systematic failures - collapse of bond insurers.
3. The housing bubble looks like it is only half way through its deflation.
4. There are however silver linings. American firms did not add jobs or expand capacity too aggressively throughout the expansion. This means that except for banks & retailers, the loss of jobs will be gradual.
5. The housing bubble was primarily in US & US, while Asia will be affected there is alot of momentum in Asian economies to keep growing unless the US recession is very long. Remember how the Asian economies were retooled after Asian crisis, it was not a worthless exercise you will see some resilence as the US slows.
6. The aggressive Fed cuts will directly translated to bank earnings this will offset their losses in subprime. However, the other shoe - bad debts due to credit cards will keep growing in the coming months.
7. Inflation threatens to grow into a monster and if it escalates, the situation will deteriorate.
While everyone is so pessimistic about the US economy including myself, nothing is certain in this world and the stock market is very good at discounting the economy, that is why Buffett never decide on his investments based on the US economy - if anything, he buys more when everyone is bearish. Right now there are savvy real estate investors hunting for bargains in California, bargains only appear when everything looks bad and uncertain. You know why most investors miss out on bargains? When bargains appear, they always expect prices to go lower because everything looks so bleak.
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