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MAKING CENTS OUT OF THE NEWS
Blog #18
(May 7th, 2009)
RUN, DON'T WALK, TOWARDS THE LIGHT AT THE END OF THE TUNNEL
By Tom McAllister, CFP™
Much ink has been squandered on financial market commentary to the effect of "Things are different this time!", "Never since…..", and "Never before…". In the real world, both the economy and the stock market seem to be following the classic recession-emerging playbook, after all.
I have been predicting a bottom in the economy would happen this quarter or next; it appears I was on target (in fact, we may have seen that bottom in the month of February with all that month's bleak news). At McAllister Financial, we advised clients to "stay the course". In a recent blog post, I talked about the stock market leading economic changes by six to twelve months. The stock market has rallied 33% from its bottom March 9 through May 5.
I believe this rally is for real, and that it would be wise to 100% invested at this point.
Federal Reserve Chairman Ben Bernanke, addressing Congress last week, said the economy should start growing again later this year, warning that, even after a recovery is underway, economic activity will remain subpar for awhile. Businesses will remain cautious about hiring, driving up the nation's unemployment rate and causing "further sizeable job losses" in coming months, Bernanke told the Joint Economic Committee. He expects unemployment to top at under 10%. "Recent data suggest the recession may be loosening its grip on the country. The pace of contraction may be slowing." This observation was the basis for the Fed's decision last week to take no additional steps to shore up the economy.
Bernanke went on to comment on several aspects of the U.S. economy:
Housing:
The housing market, which has been in a slump for three years, has shown some signs of bottoming.
Consumer spending:
Spending, which collapsed in the second half of last year, came back to life in the first quarter. "In the months ahead, consumer spending should be lifted by tax cuts contained in President Barack Obama's larger $787 billion stimulus package. Still, rising unemployment, sinking home values and cracked nest eggs will weigh on consumer’s willingness to spend freely."
Service Sector:
The service sector contracted at a slower pace in April.
Business Investment:
Business investments remains extremely weak. Conditions in the commercial real estate market are poor. However, Bernanke is hopeful factory production will pick up later this year to replenish stockpiles of goods.
Exports:
Declines in other countries' economic activity may be moderating, which could help U.S. manufacturing sales which have been falling sharply.
Credit and Financial:
Financial markets remain under considerable strain The Fed's forecast for a recovery hinges on the government's ability to gradually repair the financial system. "A relapse ... would be a significant drag on economic activity and could cause the incipient recovery to stall," he warned.
As a student of the market for more than forty-six years, I know we could have a pullback in the stock market of 8-10%. This will represent another buying opportunity for those not yet fully invested. For those who are fully invested, I recommend staying the course.
History shows returns in the year following recessions have almost always been positive, in fact positive in the double digits. Here are the facts.
Note: 2001 figures were skewed by the 9/11/01 terrorist attacks, which threw the stock market down sharply. The market recovered nicely after the third quarter of 2002.
Next week we will share how investors can “layoff” risk and gain income through by using stock options.
With all the rapid changes in our economy and in the investment markets, there are many investors who would benefit from more consistent guidance. We are currently accepting new financial planning and investment clients, and would appreciate your referrals.
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