Mid-Year Market Outlook

As we close out the first half of 2008, we find our economy dipping deeper and deeper into recession and the US stock market teetering on the brink of a bear market.  Our economic woes first appeared last year with rising home mortgage defaults as many homeowners found themselves upside down when their home values fell below mortgage indebtedness.  It’s now apparent that our esteemed financial institutions fell victim to their own greed as they became increasingly creative in their lending practices, often offering mortgages with little or no money down to people who had less than stellar credit.  To complete the perfect storm, we have gasoline prices at $4 a gallon and rising; food costs rising and unemployment at its highest level in two decades. 


The consumer, who is responsible for more than two-thirds of our economic engine, is just about tapped out.  Evidence of this abounds as homeowners are falling behind on mortgage loans and home equity lines of credit faster than at any time in the past twenty years.  Delinquency in credit card payments is also rising indicating that consumers are fast running out of sources for paying their bills. 


The stock market has responded by flirting in bear market territory with the Dow down almost 20% since its October 2007 peak. 


So what can we expect for the second half of the year?  By all accounts, things are likely to get worse before they get better.  Consumer spending for May and June was boosted by approximately $71 billion in tax rebates with another $45 billion to come.  As the rebates run out, expect the economy to worsen.  On a global basis, the International Monetary Funds suggests that the credit crisis is a $900 billion problem, of which about $400 billion has already been written off…meaning we may be less than half way through the credit crisis, extending its reach into 2009. 


How should you prepare yourself?  I have two schools of thought:

  1. In a credit crisis, cash is king.  Think of all the ways you can raise and conserve cash.  Be sure your cash is stored in a safe place such as US treasuries; FDIC insured bank deposits and CDs and high quality money markets.  Note that not all money market funds are equal.  Just last month, Legg Mason, Inc., a large brokerage firm, elected to contribute $240 million to bail out three money market funds of one of its subsidiary companies. 
  2. Any crisis breeds opportunities.  Consider using this as an opportunity to invest over the next twelve months in beaten-down assets such as bank stocks and real estate.  Remember, the bottom of every bear market is preceded by overwhelming pessimism and capitulation.  If we are not there yet, it seems we will be in the not too distant future.


If it’ll make you feel better, not everyone is hurting.  According to the Wall Street Journal, in the oil-rich region of the Persian Gulf, one businessman made headlines and the Guinness Book of World Records for paying $14 million for a custom car tag reading “1” while his cousin paid $9 million for a tag reading “5”.  I don’t know about you, but the extra $5 million to be number one seems like a bargain.