Are we heading into a recession?
By Steve Ause
Special to the Bonanza
It is surely a hot topic of late. The stock market has suffered. And many Incliners’ wealth has been trimmed.
Several brokerages have made a recession call. In my firm’s view, while it could happen, the things that usually accompany a recession are not in place now, notably high business inventories, excessive wages, too much capital expenditures, and other costs that businesses pass on to consumers that push at inflation. The Fed then reacts to inflation, raises rates, profits are squeezed, spending declines, and a spiral begins. We don’t see that being what is happening now.
This period may be similar to 1998 when the market declined significantly for a recession that never happened. Perception is reality. It reminds me of the saying that “economists have predicted 13 of the last four recessions.” But, there is a chance.
Surely, the weak dollar and high oil prices are significant headwinds for the economy and the stock market.
I have recommended a very defensive portfolio to clients. There was hope that the Fed’s announcement of an impending interest rate cut, or the inflation numbers, or corporate earnings announcements would provide a catalyst to inspire the market to turn up, but none have. Furthermore, if one is into looking at charts of the market (especially the S&P500), one can see that the S&P sunk to a level in mid-August of 2007, and bounced up. It then went to a level that exceeded the 2000 market high and then came back down and again and hit this same general level in late November, bounced up again, and then again in early January of this year. This resembles a “floor’” and the more times the market bounces off these floors, generally the more confidence that the floor is solid and a barrier to moving lower.
But now that we have fallen through the floor, and the fact that perhaps there is no immediately apparent catalyst to move the market higher, the path of least resistance may be for the market to keep sliding down. So, I would rather wait until the market seems to be in an uptrend again and market conditions and sentiment seems better. Of course, waiting for a trend means it is been moving for awhile, and I will miss out on part of it. But, right now, I would rather protect than worry about missed short-term gains.
To me, protection is a high priority. While we all like to think of ourselves as “long term investors,” it took seven years for the S&P to get where it was in 2000. That is a big chunk of a retired person’s life.
Steve Ause is the LPL branch manager of Retirement Investing and an Incline Village resident.
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