Is the recession over?
With news reporting the recession is finally over and the stock market recovering over 50% from the March 9th low, we need to ask: is the economy truly improving? Many in the financial media and on Wall Street would like you to believe this is the case. However, a further reflection of what’s truly happening on Main Street shows a completely different tale:
It’s estimated that:
- Unemployment will hit double digits
- One in three commercial loans is on verge of default
- Payments on over one million adjustable rate mortgages are about to significantly increase
- Personal bankruptcies are up 33 %
- Business bankruptcies may increase by over 60% before 2009 comes to a close
Dead cat bounce?
Not to be all doom and gloom, but we need a little dose of reality. Did we not learn anything from the crash of 2008? Based on all the economic data, what we are most likely seeing with the stock market recovery could be what’s known as a dead cat bounce. A dead cat bounce is a figurative term used by traders in the finance industry to describe a pattern wherein a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement, with the connotation that the rise was not an indication of improving circumstances in the fundamentals of the stock.
This could very well be the case with the overall markets. We went so low with the crash. The Dow was at 14,000 in October of 2007 and hit 6500 in March of this year. A stock market recovery can occur simply because selling was overdone which I believe was the case. Should the Dow be over 10,000?
Money hides problems
Get this: when the US government throws that amount of money (over $700 billion) at the economy, it’s bound to have some effect. In the short run it can make things look better than they actually are before reality sets back in. The government has traditionally relied on the auto and home industries to pull us out of a recession, but with this recession so deep it’s simply not working as intended.
Any look at the recent data on employment, demand for credit, consumer spending numbers, and the lack of saving being done by Americans, it shows a pattern: there is little hope of a quick, sustained economic recovery. The U.S. economy may truly be out of a recession, this does not mean a consumer recession will cease. Americans are trapped by their debt. Too many are in over their head and are facing unemployment, less hours, lower pay, increased taxation, and an inability to keep up with debt payments.
What does this mean to you?
This means that your financial decisions, especially when it comes to investing, should be done with caution, wisdom, and prudence. Here are three lessons we should have learned from the crash of 2008 and can apply to today’s markets and economy:
1) Take responsibility to know where you’re investing
No more blindly handing your money off to a mutual fund, portfolio manager, or advisor. The Bernie Madoff Ponzi scheme brought to light the need to truly know where your assets are being held. Do research on your advisor and check into their certification www.finra.org and the CFP board are two great places to start.
Kingdom Advisors and The National Association of Christian Financial Consultants (NACFC) are two organizations to help you find an advisor who shares your Christian faith. Also look to make sure your investments are in line with your values. Are you investing in companies involved in the abortion, pornography or gambling industries?
2) Position your portfolio for your goals, not to beat an index
Many people place too much importance on trying to beat the stock market. How much of our society compares all of our investing to the Standard & Poor’s 500 index? When you beat the market you’re happy and sad when you underperform. Why is this? Are your goals really tied to the stock market?
This perspective is flawed from the beginning. For example, would you have been happy at the end of 2008 if your investment accounts were down 35%? The market, as indicated by the S&P 500, was down 38.5%. You beat the market by 3 1/2%! Somehow, I don’t think you or your spouse would think this was great news. That is why “beating the market” should not be your goal.
The true purpose of investing is to help you accomplish your goals. The rate of return you need to achieve should be independent of stock market returns. The market returns only enable you to see if your goals are realistic. For example the need to send children off to college, or purchase a home, or obtain financial freedom, using the S&P 500 as a benchmark has no importance to your personal goals. When you focus solely on the returns of the market you miss the true purpose of investing: reaching your personal goals.
3) Take defensive measures
In football, it’s often said that the best offense is a good defense. It is the same way with the stock market. Don’t be afraid to hold cash in your portfolio mix. Liquidity (ability to access money) is becoming more and more important. Have at least three to six months, preferably more, set aside for emergencies.
Seek broader diversification with your investments. Having a good mix of stocks, bonds, cash and alternative investments is more important than ever. Investments outside of the traditional stock and bond market, such as running your own business or participating in someone else’s, precious metals like gold, real estate, or commodities provide opportunities to achieve attractive returns independent of the stock and bond markets. This market is far too unforgiving and volatile to not be properly diversified.