As we pass the halfway mark for this year the global economy appears to be decelerating. Let’s look at the data and then discuss how investors should position their investments to prepare for the possibility of a double-dip recession.
China, the world’s second largest economy is showing signs of inflation easing along with outright deflation of producer prices. This is an indication that orders from foreign buyers for China’s huge manufacturing sector is contracting.
When we look at Japan, the third largest economy in the world, core machinery orders plunged over 14% raising speculation that their economy will soon stall.
Taiwan is the world’s largest producer and exporter of electronics and therefore is a good indicator of global consumer demand. They now face four months of continuous decline in exports.
We all are aware of what’s going on in Europe. Greece, Spain, Italy, Ireland and a host of other countries are facing a debt-laden financial crisis that could spill out across the globe.
Here at home, the most recent jobs report suggested that our economy may also be entering a new deceleration phase. Straight ahead is the so-called ‘fiscal cliff’ where the Bush tax cuts will phase out (December 31, 2012) effectively increasing taxes on most Americans and federal agencies will face across-the-board automatic spending cuts because lawmakers couldn’t decide where to make strategic cuts. Neither Republicans nor Democrats seem willing to pass any legislation that might give the other an advantage in the November elections so ‘stalemate’ appears to be the order of the day.
Even Warren Buffet recently commented that he’s seeing declining sales across his jewelry and other retail businesses.
This is all pretty scary stuff especially if you are an investor. It’s even scarier if you are a retiree. How do you decide how to position your investments to survive, or better yet, thrive, in the face of a perilous global and domestic outlook?
First, take a step and take a clear look at your broad choices. In the broadest sense, your money will either be invested in fixed income investments (money market accounts, CDs or bonds) or equity investments (stocks, real estate or a business).
Fixed income investments. We are coming off of a decade-long bull market in bonds precipitated by declining interest rates. Today, interest rates are at historical lows with the 10-year treasury yielding 1.65%. While it’s possible that interest rates could go lower, I believe the next big move in interest rates is higher rates and that spells trouble for bonds.
Equity investments. A bull market in bonds has delivered a bear market in stocks. Today, however, much of corporate America is in very good financial shape. Virtually every company in America has used this Great Recession of 2008 as an opportunity to drastically cut expenses and store up cash. The biggest expense for most companies is employees which is why we now have 20 million or so unemployed Americans. These companies are lean and mean and are making money. Stocks, in my opinion, are where the opportunity is over the next five years or longer.
Investor Strategy
If you’re a worker receiving a paycheck and are at least ten years away from retirement, consider using stocks as the cornerstone of your portfolio with an allocation of seventy to one-hundred percent. I know investing in stocks can be scary, but I see little opportunity in bonds. Hopefully you are able to dollar-cost-average new money into the market on a monthly basis. This will help you take advantage of the dips in the market along the way.
If you are a retiree, or pre-retiree, you’ll need to have a minimum of two to ten years or more of annual cash flow needs invested in high quality bonds, CDs and money market accounts. Do your best to ‘match’ the maturities to your annual cash flow requirements. This creates a ‘safety-net’ of cash flow between you and having to sell stocks when they are down in order to raise cash for your expenses.
For stocks, I favor the big blue chip companies that have a long history of paying dividends such as Southern Company, AT&T and Exxon. You’ll want a minimum of twenty stocks in your portfolio and make sure you are diversified by industry as well. Often the winner of the contest goes to the person who has the courage to act in the face of fear!
If you’re not comfortable structuring and managing this strategy yourself, seek the help of a professional investment manager.