March 2008 |
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By March I am tired of the snow and the cold wind and I am looking forward to those warm spring days. However, I have lived in northern Michigan long enough to know that it could be May before the snow stops falling so I survive the remaining weeks of winter weather by cranking up the Jimmy Buffett music and "Siesta Key dreamin". Like the seasons, recessions and bear markets are part of the economic and market cycles that we must endure in order to enjoy the more prosperous times. Surviving challenging times like we face today may require actions that conserve financial resources and increase savings in order to ensure adequate income in the future. On the other hand, we must not get so mired in the bad news of the day that we fail to be on the lookout for the great investment opportunities that come our way.
Although advances in technology and better business practices have moderated the economic cycles over the last 10-15 years, they have not eliminated the inevitable recession. Human nature seems to always create imbalances during times of prosperity that eventually have to be rectified. The bursting of the real estate bubble is only the latest example.
Whether or not the U.S. economy is currently in a recession is a question that will be answered many months from now. All I know is that it sure feels like one.
The consumer, who represents 70% of the economy, has tightened the purse strings as home prices continue to fall and gas prices hit new highs. It is expected that it will cost over $4.00 a gallon to fill a car this summer. It is also costing more to put food on the table, which leaves less money to spend on more fun things.
People are feeling less secure about their jobs, especially in Michigan, as we read about companies reducing their workforce or closing offices to save money. The U.S. unemployment rate has risen from 4.5% a year ago to about 5.0% today and will likely climb higher in the months ahead.
Needless to say it is understandable that consumer confidence has fallen to a 16 year low. There is not much good news out there right now and it is difficult to see an end to this downturn.
As is normally the case, the stock market anticipated this possible recession and began selling off after hitting highs last October. The S&P 500 Index was off 19% at its low in January, which is within a hair of being labeled a bear market. The question on every investor's mind now is will that January low hold. It has so far but the market is soon going to need some signs that an economic recovery is around the corner before we can be confident the worst is over.
The good news is that the Federal Reserve and the federal government are taking action to turn this economy around. The Fed has slashed the short-term federal funds rate from 5.25% last summer to 3.00% today and is expected to get it down to 2.25% at its next meeting in March.
Being that this is an election year, our political leaders were able to quickly put together a $170 billion stimulus package that will put money in the pockets of most taxpayers within the next few months and encourage business to invest in new equipment. This stimulus program has been used in prior economic downturns with some success.
As we wait for these actions to help jumpstart the economy and hopefully spark a new bull market rally, there are some things we can do to reduce the anxiety we are now feeling about our financial futures. (None of them has to do with "wastin' away in Margaritaville".)
1) Protect your job and income. Now is probably not the best time to be asking for a big raise or to be taking extended vacations. With the unemployment rate rising I would be focusing on making myself more valuable to my current employer instead of looking for another job.
2) Spend less and save more. It is usually during recessions when we are feeling less secure about our financial situation that we wished we had saved more in the past. There is no time like the present to start. Spending less and saving more is cathartic and empowering during these stressful times. One way to help in this endeavor is to lock up the credit cards and only spend cash. It will reduce your spending.
3) Consider taking less for awhile. If you are retired and living off your investment portfolio now would be a good time to revisit the amount of distributions you are taking in relation to the size of your portfolio. Stock and bond market returns have only provided annualized returns of about 4 to 6% over the last three and ten year periods. If you have been taking more than 6% a year out of your account you may be spending more than you are making in investment returns, which is not a wise long-term program. Bear markets will only make this situation worse.
Generally speaking, we do recommend that most retired people keep their yearly distributions to between 3 to 5%, especially if they have over a 20-year life expectancy. Limiting your draw helps allow for some growth to stay ahead of inflation.
4) This too shall pass. While it is wise to hunker down to some extent during recessions and bear markets, it is important to remember, "This too shall pass". I've been managing investments for 25 years now and you can bank on economic recoveries. Remember, recessions normally last less than a year and bear markets often provide big investment opportunities. Thankfully, we are finding stocks that have substantial upside potential when the economy is growing again and being ready to buy low is the name of the game.
These actions are pretty basic in nature. Tougher times have a way of accentuating the essential truths in life. As they say, when the tide goes out we tend to find out who has been swimming naked. The best policy, in life and in investment markets, is to look down more often than you tend to look up and to never be over-exposed.