Bernanke says the recession is over, so is now the time to pile into stocks?

The answer depends on your goals, the gap between those goals and your resources, and your outlook for stocks. I can't speak for the first two and while I can write about the third, I don't know what will happen next. But Fed Chair, Ben Bernanke, thinks that the recession is over. If he's right, does that mean the economy will be grow rapidly, thus boosting corporate earnings and stock prices? If earnings and stock prices go together, it might be time to buy -- but I just see massive uncertainty.

My lack of confidence in a clear path for stocks has to do with a raft of unanswered questions:

  • Having risen 37 percent since its March lows, does the Dow already reflect that boost to earnings?
  • Is the economy facing years of stagnation due to its dependence on consumer spending?
  • Is the recent run in stocks a head fake -- like the one in 1932 -- with another big down leg due to a crisis in commercial real estate (CRE)?
  • Are we on the verge of a massive uptick in inflation thanks to the dollar-weakening-effect of the $23.7 trillion that the U.S. has poured into the financial system?

Based on this uncertainty, it helps to think about which of the following four scenarios is most likely to unfold:

  • Explosive growth. With companies having cut back inventories and production, the low interest rates and flood of federal money into the economy encourages consumers to start spending money to buy goods. To meet this demand, companies start hiring workers to satisfy the demand. Adding workers leads to increased consumer spending and thus more demand and hiring. This virtuous cycle boosts earnings far above expectations -- sending stocks soaring.
  • A decade of stagnation. With seven million people out of work and hundreds of thousands more losing their jobs every month, factories -- which are already operating at a relatively low 68 percent of capacity -- keep firing staff in response to declining demand. With 70 percent of GDP growth coming from consumer spending, the millions of unemployed have little income to spend and can't borrow. The economy is unable to grow because jobs keep getting destroyed. Stocks stay within a trading range.
  • Another leg down. This year's stock market rally turns out to be a head fake as a big chunk of $6.7 trillion of CRE loans and $700 billion worth of CRE-mortgage backed securities (CMBS) go sour -- leading to another wave of bank capital crises. This second down leg -- possibly of the same scale as the subprime collapse -- causes stocks to fall below the lows they hit last March.
  • Out of control inflation. Traders use cheap government financing to bet on a declining dollar and rising commodity prices. Despite weak demand and excess supply, commodity prices rise because the power of traders to influence those prices overwhelms the impact of "real" supply and demand on those prices. The result is a rise in prices for stocks of companies that make those commodities.

To further complicate things, it would be possible to have combinations of these. For example, we could get stagflation where rising commodity prices combine with a decade of economic stagnation.

But I don't know what will happen. One way to proceed would be to make a guess about which of these scenarios is most likely to happen and then make your stock investments accordingly. For example, if you think wild inflation is most likely, bet on commodity stocks.

What do you think?

Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter.

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