Today is officially the first day of summer…a time when children celebrate a break from the classroom. While they think of play, it’s a good time for adults to reflect on where we’ve been and what’s ahead as far as the economy is concerned. The recession that became apparent in 2008 ushered in the worst bear market since the Great Depression with a stock market that collapsed 50% from peak to trough. This year the market has seen a recovery of sorts from the March 6th lows gaining 30%. Still, we remain 39% below the market peak in 2007. So where are we in the economic pendulum and what does it mean for your personal finances?
Most economic indicators suggest that we have turned the corner in the economic recession. This may sound crazy when you consider that housing, unemployment and manufacturing all are continuing to deteriorate. But the fact is that they are deteriorating at a decreasing pace. This suggests that we are approaching the bottom of this recession. You could expect to see the economy bottom out before the end of the year or at least by the end of the first quarter of 2010.
If this is the case, how should you position yourself now to benefit from the recovery? A key trend to remember is that the stock market tends to move up ahead of the recovery. Investor emotions tend to swing like a pendulum from greed to fear. Once the pendulum reaches its apex, it can reverse course quickly. I would suggest we passed the apex of fear sometime during the first quarter of this year. There is still plenty of fear to go around and still valid reasons for concern about the economy and the financial markets. There is also opportunity. Warren Buffett says that when the markets are dominated by fear, its time to be greedy…meaning now, when investors have moved trillions of dollars to the sidelines, it’s time to invest. The fact that we’ve had strong market performance since March suggests we may be in for a sell-off sometime during the summer or early fall as investors take profits and regroup. While the short-term trend for stocks may be weak, the mid-term (12 to 24 months) trend is strong. The long-term trend (36 to 48 months-plus) is highly inflationary. You simply cannot print as much money as the government has printed to bail us out of this recession and not end up with high inflation. But that problem is several years away.
For now, review your personal investments and if you are holding substantial cash, consider systematically moving it into the market with the goal of being fully invested based on your target equity allocation by the end of the year. If you have halted your investment program, begin now investing monthly into stocks. This dollar-cost-averaging strategy should serve you well over the next two to three years.