Could it be? Is this recession finally on its last legs? Well, wishful thinking never accounts for much, but battle-weary Americans finally have some solid proof that this long, protracted economic crisis is at last coming to an end.
Signs of life
The Federal Reserve's latest survey of business conditions shows that economic activity has either stabilized or is improving in most areas of the country. Businesses in most of the Fed regions reported that they were "cautiously positive" about future economic growth. In fact, all but one of the Fed's 12 regions indicated that economic activity had firmed or stabilized. This is far from a ringing endorsement of a return to heady growth, but for the economy, it's an important first step in leaving the recession behind.
To further add to gathering optimism, analysts now estimate that the economy is growing at a roughly 3%-4% annual rate in the current third quarter. That's pretty much in line with long-term average growth. Of course, much of this growth is due to increased auto sales from the likes of General Motors (NYSE: GM), which have gotten a boost from the government's Cash for Clunkers program. The recovery won't have any staying power if consumers don't start spending again to pick up some of the slack, but nonetheless, it looks like conditions are firming across the country and setting the stage for future growth.
Getting a jump-start on recovery
While any signs of growth are welcome, folks should remember that even if the recession has technically already ended, it likely won't feel like it has ended for some time to come. Unemployment will remain uncomfortably high well into 2010, which will put a damper on any truly comprehensive recovery. That means it may not be a straight-shot market climb from here on out. Be prepared for more fits and starts, and maybe even a correction, along the way. Overall investor sentiment is still largely negative, and the market certainly isn't as cheap as it was six months ago, but bargains are still lurking out there.
So where can opportunistic investors look to capitalize on a recovering economy? Well, there's one area that has, more often than not, led the rest of the economy out of recession -- small-cap stocks. As business conditions improve and credit thaws, smaller companies are usually the first out of the gate. Investors looking to make a mint on small-fry companies can take a cue from one of the best small-cap shops around -- Royce & Associates. Management here likes what it sees in the industrial materials sector, with big bets on names like Canadian mining companies Silver Standard Resources (Nasdaq: SSRI) and Pan American Silver Corporation (Nasdaq: PAAS), as well as Intrepid Potash (NYSE: IPI) closer to home.
Of course, this time around, small caps may not have quite as much room to run as they have in prior recovery periods, given the nice rise they've had in the past decade or so. But you can still capitalize on the potential for appreciation that these faster-growing companies offer -- by fishing in mid-cap waters. In fact, mid caps have outpaced large-cap and small-cap stocks by nearly 10 percentage points so far this year! It looks like mid caps have hit the investing sweet spot, the perfect blend of growth and stability in these troubled economic times. Manager Joel Tillinghast of Fidelity Low-Priced Stock (FLPSX) has been adding to his stock of mid-sized consumer companies like Gildan Activewear (NYSE: GIL), Royal Caribbean Cruises (NYSE: RCL), and food and drug retailer Safeway (NYSE: SWY). Thanks in part to his focus on the middle of the market-cap pack, Low-Priced Stock is up 34% this year through the end of August.
For more on the investments that will give you the best bang for your buck while the economy gets back on its feet, check out the Fool's Rule Your Retirement investment service. With your free 30-day trial, you'll not only get the latest financial planning and retirement advice, but you'll also get the inside scoop on the best mutual funds to help you reach those goals.
So even if the current recession has taken its last breath, the economy is still likely to be on life support for some time to come. Recovery will not be easy, or quick. But it will get here ... eventually.
Amanda Kish
heads up the Fool's Champion Funds newsletter service, a division of Rule Your Retirement. At the time of publication, she did not own any of the companies mentioned herein. Click here to find out more about the Fool's disclosure policy.
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