Is the U.S. in recession?
Opinions about whether the U.S. is in recession are all over the board. Why is there no clear answer?
What should you do with your investments?
Financial trade publications disagree. "Buy global funds! Buy foreign funds! (Is there a difference?) Buy U.S. funds! Buy Euros! Buy commodities!" Ugh.
What is a Recession?
A recession is defined by most people as "two consecutive quarters of negative Gross Domestic Product growth." In English, that means that the U.S. economy is shrinking, not growing, for at least six consecutive months. The last quarter for which data are available says that the economy grew .6% in the fourth quarter (ended December) 2007. So, if there is a recession, the earliest it could have started in January, 2008. We'll get preliminary figures for the first quarter 2008 in about a month. Preliminary figures can, and do, change.
Are We in Recession?
According to the Philadelphia branch of the Federal Reserve Bank, growth in the first quarter of 2008 was projected at .7%, with the probability of a downturn at 47%. Growth in the second quarter of 2008 is projected at 2.3%, with the probability of a downturn at 43%. So, very small growth is projected, with a probability of less than 50% of an actual contraction.
Any way you look at it, growth is projected to be less than normal at best, and recessionary at worse, in the first half of 2008. Nobody - not the Fed, not the President, not Congress, not Warren Buffett - nobody will know for sure whether there has been a recession until second quarter 2008 preliminary figures are promulgated next July.
And by then, it may be over.
How Do Markets Work During Recessions?
The stock market is a discounting mechanism. That means that it looks about six months into the future and prices accordingly. That said, if growth (at 2.8% according to the Philly Fed) is predicted for the second half of the year, the correction should be about over, and it may be time to start taking a look at investing some of your portfolio now.
Are You a Stock Market Investor?
You may be a candidate for stock market investing IF
- Your investment goal is at least five years away; and
- Your tolerance for risk is appropriate (you can absorb a 20% correction, or decrease in value, without selling); and
- You have adopted a selling strategy (you know why you're buying and the conditions that would cause you to sell).
Currently, an investment in the Standard & Poor's (S&P) 500 will cost you about 13.60 times projected earnings. That means, for every dollar of projected earnings over the next year, you'll pay about $13.60.
Is that a good price?
Well, according to S&P, the "benchmark " price for this index is 15.74. At 13.60, the price you'd pay now is about 14% less than its long term average price of 15.74.
What to Buy?
Lots of pundits are suggesting putting money in "Emerging Markets," which include behemoths India and China - places where growth is in double digits and climbing. The price of these markets, however, is sky high, and the price you pay is in dollars, which has generally fallen in purchasing power compared with other currencies. And, most importantly, would you know when it's time to sell?
The safest bet, according to many, is the U.S. market. Some pundits further suggest investing in U.S. companies that earn a significant portion of their earnings overseas. Those are called global stocks. (Foreign stocks are those companies headquartered outside the U.S.)
By and large, the safest way to invest in the U.S. is to buy an index, or group of stocks. There are many indices - the Dow Jones Industrials, the S&P 500, the Russell 2000, the Wilshire 5000 - 30, 500, 2000, and 5000 companies, respectively. As a general rule, the more diversified you are, the less volatile your investment, as compared to the market as a whole. The index of choice for many investors looking for companies with significant overseas sales is the S&P 500.
Some investment theorists believe that, over the long term, very, very, few investors beat the returns of the market as a whole, so it's best to invest in an index fund. Index funds have the additional benefit of having low management fees, which leaves more of the return in your portfolio.
When to Buy?
Because no one knows if there is a recession, or when it will end (if there is one), exactly when the market has discounted the bottom of the cycle is tricky. Assuming we rely on the Philly Fed's number, the third and fourth quarter are projected to grow at 2.8%. If you agree that the market discounts about six months in the future, it's time to start looking now.
Cheers