| Why could the U.S. be heading into a | | | | this suggests a recession is not in the |
| recession? The most likely reason is the | | | | offing. But the market could change |
| housing market- a multi-faceted subject. | | | | direction at any time. There's a saying that |
| There's the new home building sector. | | | | the stock market has predicted ten of the |
| | | | last five recessions. |
| It's important because it employs so many | | | | |
| people, not just in construction but, by | | | | So maybe it's not such a perfect predictor |
| extension, in the industries that supply | | | | after all. The stock market also anticipates |
| materials to the homebuilders - lumber, | | | | economic recoveries. Add to the mix the |
| concrete, appliances, and even retailers like | | | | psychological difficulty of investing in |
| Home Depot. | | | | stocks when things are the bleakest (the best |
| | | | time to buy) and it demonstrates the |
| Think about all the "stuff" that goes into a | | | | difficulty (impossibility, for most of us) of |
| home and how much you buy when you move. A | | | | trying to time the market. |
| slowdown (or collapse) in new home building | | | | |
| has a ripple effect throughout the economy | | | | Most investors should be in the stock market |
| and could drive up the unemployment rate. | | | | to take advantage of growth in principal |
| | | | value and income which comes through the long |
| Housing market problems are not limited to | | | | term ownership of equities. Stocks which do |
| new home sales. The value of your home and | | | | best in recessions are those of the strongest |
| the market for sales of existing homes is | | | | companies and companies whose products |
| falling. By how much and for how long is the | | | | consumers must keeping buying (think toilet |
| big question. But the problem here is the | | | | paper not cars). |
| equity we have in our homes is evaporating. | | | | |
| | | | The stocks to focus on are big cap companies, |
| Even worse, those of us who have recently | | | | consumer staple products and health care. |
| purchased homes or have taken money out of | | | | There's an overlap between many big cap |
| our homes, through refinancing or home equity | | | | stocks and consumer staples and health care |
| loans, may have no equity left. A reduction | | | | companies. I'd also add to this list |
| in home values reduces homeowners net worth, | | | | companies with significant international |
| causing them to pull back on spending. | | | | sales. (Did you know that a majority of |
| | | | McDonald's, and many other U.S. companies, |
| The mortgage market mess is the last, but the | | | | sales are overseas?) There's also a |
| not least, of the housing market issues. | | | | substantial overlap between big cap and |
| The big problem is not subprime mortgages, | | | | international sales. You can find many good |
| it's adjustable rate mortgages. Bumps in | | | | mutual funds which focus on these areas. |
| mortgage payments due to contractual | | | | |
| provisions or an increase due to a rising | | | | Will this investment strategy provide a |
| LIBOR rate - most mortgages are tied to this | | | | positive return during a recession? Not |
| rate and it may rise even if interest rates | | | | necessarily but it will keep you in the stock |
| fall in the U.S. - will force consumers to | | | | market with a minimum amount of risk and the |
| cut back spending in other areas. Lastly, | | | | long term investor will be well positioned if |
| will more stringent lending standards | | | | there is no recession or for the upturn in |
| exacerbate the new home construction and/or | | | | stocks after the recession occurs. |
| existing home value problems? | | | | |
| | | | What about bonds, you ask. Don't they do |
| There are other economic concerns as well - | | | | well during a recession? Yes, if interest |
| consumer spending (beyond the impact of the | | | | rates decline as a result, but that may be |
| housing market), rising energy prices, the | | | | occurring just when stocks are beginning to |
| U.S. balance of trade deficit (are jobs being | | | | rally again. |
| exported as a result?) So, if you're | | | | |
| concerned about the possibility of a | | | | With long term U.S. Treasuries yielding below |
| recession, and who shouldn't be, how do you | | | | 5% (some good money market accounts have |
| invest? | | | | higher yields) how much lower can interest |
| | | | rates go, so how much higher could bond |
| The stock market, according to classical | | | | prices go? Focus your risk-taking |
| wisdom (or folklore) anticipates a recession | | | | investments on the stock market and keep the |
| by six to nine months. Since it's currently | | | | rest of your capital in cash. |
| at record highs (at least the Dow and S&P) | | | | |