They say that if you laid all of the world’s economists end to end, it wouldn’t be a bad idea! Normally no one wants to talk to a boring economist, but with the current upheaval in the credit, stock, and housing markets, I’m somehow popular again! We’ve already discussed the Wall Street bailout in the past four Sunday postings, so we won’t go into detail about this topic. Instead I’ll try to answer some of the questions I hear most often from friends and acquaintances.
Before you read the rest of this blog, please understand this disclaimer: I am not your financial advisor and make no claims as to relevance of my opinions or the accuracy of my predictions. If you use anything in this column to guide you in making personal financial decisions, the risk is entirely yours and I assume no responsibility for your actions. In my world, no one is too big to fail, and if you make bad personal financial decisions it will be (as my old scoutmaster used to say) “Tough Titty.” Don’t count on Henry Paulson to bail you out. Who do you think you are, a Wall Street Banker? Hang on tight, mates….here goes!
How bad is the Economy, really? I constantly hear people in the media using terms like, “credit crisis”, “housing collapse”, “deep recession”, and even the supposedly upcoming “world economic Armageddon”. Don’t let these scary words disturb you. The American economy is extremely resilient; able to ward off in just a few months even big shocks like the savings and loan crisis in the early 1980’s and the 911 terrorist attacks in 2001. The toxic loan problems and credit crunch that we are currently experiencing will also abate within 18-24 months. They could have been settled within 12 months if it were not for the intervention of the Congress in their 700 billion pork-barrel bailout.
Are we in a Recession? If so, how bad will it be and how long will it last? Technically, the US economy is not in a recession (two consecutive quarters of declining real GDP) as our economy is still growing in real terms. However, there are signs of a slowdown of consumption spending and unemployment rates are rising. I suspect that by the second quarter of 2009 the data will show we’ve entered a recession as of the end of 2008. I think that this recession will be moderate (not severe and not mild), lasting until the middle of 2010 and with a maximum unemployment rate of 7.8%. This recession will not be as bad as the 1980-82 recession and a bit worse than the 2001-2003 recession.
Why have stock prices dropped so much over the last two weeks? One word explains this; PANIC! When virtually every blue chip stock drops 10-15% in one week, this cannot be explained by a sudden “worsening” of the financial condition of those businesses. General Electric didn’t suddenly become 15% less valuable last week, nor did Fastenal or Union Pacific Railroad, or even General Motors. Some individual stockholders and hedge fund managers have been dumping stocks in a fit of panic, trying to make margin calls or preserve wealth. They’ve panicked and sold into a weak stock market, driving prices way below the market values of the companies they’ve sold. There are many good (even great) companies whose stock values have plummeted over the past two weeks. Because these businesses don’t suffer from any fundamental weaknesses, the “panic” proportion of the decline (about 15%) will reverse itself soon (perhaps within two weeks).
Should I sell some of the stocks in my 401k plan? The answer here is simple…..NO! Don’t sell your stocks now. They are down 40% and the only losers in this market will be those who sell. Do yourself a favor and don’t look at your 401k statement for at least a year. It will only depress you. Most people have years before they retire and the stock values will bounce back long before they retire. Those of you who are near retirement and had a high percentage of your retirement funds in stocks may have to work a while longer; that’s the price for holding too high a percentage of stocks in your investment portfolio toward the end of your working career. But be of good cheer; stocks will come back eventually, perhaps in as little as two years. Your 401k will eventually climb back to its former value and you will not have lost a thing. The only losers are those that sell now, who will eventually have to buy back their stock at higher prices.
When will the stock market bottom out? If I knew the answer to that question you’d be paying me to read this blog! No one knows for sure. If I had to guess, I would say that the Dow Jones Industrial Average will bottom out at about 7,500. I also expect an “election rebound” for the stock market. Even though Obama will be elected to the office of President of the Socialist Republic of the United States of America, at least some political uncertainty will vanish, and reductions in uncertainty are always good for the stock market. I think the bottom of the stock market is coming soon. I won’t be able to “time” it perfectly, but I’ve got some cash lying around and will probably buy some stocks while they’re cheap. Because I’m the world’s worst stock picker, I buy index funds or mutual funds to diversify my portfolio.