It is official; we have entered into uncertain times. A year ago today if you would have thought about what was going to happen by the end of the credit crisis (we knew the crisis began a little over a year ago), would you have thought Bear Stearns, Lehman, Merrill Lynch, and Fannie and Freddie would no longer exist as we knew them?
Of course we still have the “comfort” of the constants in our society
Politicians still tout that they have all of the answers and will somehow (while increasing or decreasing government involvement) be able to fix all of the wrongs in our society. Reporters are still ignoring those little facts that can truly affect the outcome of our current predicament because those facts don’t incite extreme reactions (they really need increased viewers and advertising). Economists, also known as the “on the other hand” advisors, for the most part are touting how their predictions could still be right regardless of what fundamental news comes out.
Even though this model exists, the problem lies in that politicians, reporters, and economists are the loudest and it can be hard to see exactly what is happening with the fundamentals. In an effort to sneak through the noise, here is some of the important information that is particularly pertinent to your financial plans.
Recession has been talked about for over a year now and even though we have posted one quarter of negative GDP growth we have not entered into a recession. With this recent blow recession talks are back. This time around if we do enter a recession it will likely be a consumer-led recession. Consumers have their backs to the wall with debt levels at all-time highs, purchasing on credit virtually out of the question with really tough lending standards, disposable income expected to drop significantly in the 3rd and 4th quarters of 08’, and net-worth having fallen along with home values. Consumers might be helped if commodity prices continue to fall. According to www.bls.gov, the consumer price index recently dropped in August by .1%, though versus last year we are still up 5.4% (highest levels since 1991). So even though prices are down for August, they are more than 50% higher than they were a year ago, again according to www.bls.gov.
Retail sales recently began to show signs of a weakened consumer with sales down .3% in August, but keep in mind that sales were still up 1.6% versus last year, according to www.census.gov. Sales should be very closely watched through these holiday shopping months as the consumer is continually pressured.
For some good news: If we truly are entering into a recession, historically the stock market has reacted by dropping prior to the actual “official” start and then rising again before the bottom. If we enter into a recession, and if it is towards the end of this year/beginning of next, then we might be able to say we are close to the bottom of the stock market drop. This is what has happened historically and is not a guarantee of what will happen this time around, but it is interesting to note.
In the past the average drop in the market during a recession has been around 28% according to Nouriel Roubini’s Global EconoMonitor. The Dow is down 23% since the peak of October 9th and we have yet to technically enter into a recession.
We also had some good news recently that some posed as bad news (there are those reporters again). Housing starts were down significantly in August by 6.2%, bringing starts down by 33% versus a year ago, according to www.census.gov. How can this be good news? If you combine it with the significant rise in mortgage applications then you have a recipe for reducing inventories, which is a necessary step toward a sustainable national recovery. Once there are fewer houses than there are demand for, prices can begin to increase again.The key during any market, up or down, is to watch the trends, listen for the fundamentals and take the noise from politicians, reporters, and economists for what it is actually worth.
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