Well, it looks like we may be in for the much feared double-dip recession, which for those who read the previous post, A Correction Vs. A Bear Market, https://smallivy.wordpress.com/2010/05/26/a-correction-vs-a-bear-market/
will know means we’re in a long bear market and the fantastic rally we saw through 2009 was not the start of a new bull market but just a very large bear market rally.
Since this current recession started during the Bush Presidency, I’ve felt that it did not look like the Great Depression, as was chimed through the press, but instead like the economy and stock market of the 1960’s and 1970’s. In that environment, the stock market had several rallies, but never was able to break out of it’s trading range. Eventually, the loose monetary policy, which was enacted by the Federal Reserve to try to stimulate the economy, just resulted in inflation. Home prices soared, as did the price of gasoline, food, and everything else, but the economy did not recover. The additional money being pumped into the economy by the Federal Reserve was being used for wasteful purposes rather than the creation of goods.
The main issue then was that taxes were so high and onerous that no one wanted to step forward and start and grow a business. What was the point of expanding the business, putting in the extra hours, hiring the additional staff and dealing with the issues that come with becoming a large business if the government was going to take most of the additional money you earned? Just grow the business enough to feed your family and turn away any extra business.
This was ended by the combination of Paul Volker at the Fed, who raised interest rates high enough to stop the inflation and restore the value of the dollar, and Ronald Reagan, who lowered the tax rates and provided a reason for entrepreneurs to grow their businesses again.
The current economy is very similar. This time though the issue is not high taxes (although the fact that the Bush tax cuts will expire next year, raising the capital gains and dividends rates, along with the rates for all income levels does not help matters). The issue this time is that 1) the lenders were burned so badly by the housing bubble that they are not eager to lend, 2)the Government’s actions, taking over various businesses and choosing winners and losers has made business owners less eager to grow their businesses for fear of becoming “too big to fail”, 3) the Government’s actions in the GM take-over, in which the bond holders were given far less than the GM union, when they should have been paid in full before anyone else, has made bond buyers more wary since the bond contract is no longer considered valid, 4) the Government is propping up businesses that should have failed and giving them an unfair advantage over new businesses, thereby directing funds from more efficient to less efficient businesses, and 5) the consumer is out of money, having already borrowed far more than he/she had to buy all kinds of junk, and is now in the process of paying off his/her debts. Of these issues, the fifth is probably the most significant since all of the businesses that were set up to provide the services that people were using with money that they did not have are now closing down, laying off workers, and causing further declines.
So we are probably in for a long series of fits and starts until the consumer finally gets on firm ground and other factors are resolved. The good news is that for the long-term investor this prevents a great buying opportunity. Even in the 1970’s where the market was essentially flat, by buying as the market dipped money could be made. Dollar cost averaging, in which a fixed amount is invested on a regular schedule, or simply saving up cash and buying when the market dips by 5-10% would be effective. Patience will be rewarded.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.