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