Dow on the Decline: Is a Recession Ahead?


Uh oh, somebody said the r-word. With GDP growth clocking in at a meager 1.5%, any bumps in the road risk sending the economy back into a dreaded double-dip recession. So, when the Congressional Budget Office said Congress not addressing the impending fiscal cliff would lead to a "significant recession," investors took notice and markets started the day in negative territory.

However, as the day ground on, there was more to digest. At 2 p.m. EDT, minutes were released from the Federal Open Market Committee, or FOMC, and showed many members believed more stimulus would be needed "fairly soon." Markets initially jumped on the news, then fell, and are now climbing again.

As of 3 p.m. EDT, the Dow Jones Industrial Average (INDEX: ^DJI) is down 0.15% while the Nasdaq (INDEX: ^IXIC) has managed a 0.28% gain and the S&P 500 (INDEX: ^GSPC) is up 0.12%. Hardly the kind of outsized reaction you'd expect on a day when the r-word is being tossed about.

Fiscal cliff: what's at stake
The mixture of spending cuts and tax increases slated to begin in January is known as America's "fiscal cliff," and we're probably going to be hearing about it for the next four months. Just yesterday, Goldman Sachs warned that the fiscal cliff could send U.S. markets down 10% to 15% by the end of the year.

That's not gospel -- after all, Goldman Sachs was also the company ringing the bell about $200 oil back in 2007. However, it does show that the extended post-May rally in the markets has some significant headwinds. You shouldn't just worry about investors fearing government inaction and selling in response; the greater fear is that as the timing of the fiscal cliff approaches and the drumbeat of economic woes builds, companies will curtail spending and the economy will go into a self-perpetuated decline.

In short, the fiscal cliff storyline will likely define the macro environment for the remainder of 2012.

On to the markets
While the Fed's minutes and talk of recession dominated the news today, there were plenty of companies in the market seeing big news. Another report released today showed that sales of existing homes notched July gains after hitting an eight-month low. That sparkle of optimism was enough to send homebuilders soaring. PulteGroup (NYS: PHM) led all gainers in the S&P 500 with a 5.7% gain.

On the other end of the spectrum, Dell was today's biggest loser in the S&P, shedding 6.3%. The company reported earnings last night that -- once again -- disappointed. It's the same old song for Dell: The company sees PC sales fading and is looking to transform itself into IBM-light, a big IT powerhouse with better margins. That's a task easier said than done, and Dell's continued struggles show the challenges ahead for the company. Hewlett-Packard (NYS: HPQ) , which is following the same reinvention roadmap, saw its own stock slide 3.5%. That slide was good enough to make it the worst performer on the Dow.

Keep the long-term view
That's it for today's checkup. Remember that even if the dreaded fiscal cliff is looming, we've seen government shutdowns before. The greatest American companies not only survive, but come out the other side as leaner, more profitable companies that show long-term investors big gains. To discover some great dividend-payers in the Dow, check out our new report: "The 3 Dow Stocks Dividend Investors Need." It'll give you three great dividend-paying stocks with long-term greatness, but it won't be available forever. Just click here to grab your copy today!

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Eric Bleeker owns no shares of companies mentioned above. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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