The date is March 6, 2008 and economic data has been overwhelmingly bad for the past six months. I was concerned about the housing issue for a year before it finally came to a crash and I believe we are still going to experience continued weakness in the economy. The areas of weakness are as follows:
1. Real Estate will continue to go down. Real Estate cycles are historically about 8years, and we are just beginning the downturn cycle. I believe we are about 2 years into a real estate downturn and housing prices will be 20% less in the next two years. I believe it will affect even the most desirable places to live and places that have not yet been hit like New York City. The downturn will affect consumer spending and decrease profits in companies that rely on consumer spending.
2. Corporate earnings will be lower. Inflation and the cost of raw materials like oil, gold, and cement are increasing rapidly, causing the cost of manufacturing to skyrocket. Companies cannot raise their prices fast enough to protect their profits, so profits (or earnings) are falling. Companies related to real estate and to consumer spending are experiencing tremendous decreases in demand and earnings will be significantly lower this year.
3. Inflation will begin to affect the economy further, resulting in continued slow growth and downward pressure on the strength of the dollar. This will push boththe consumer and corporation further into debt—eroding the quality of life forthe consumer and profits for the corporation.
My advice: If you have money in the stock market that you’ll need in the next year, it would be prudent to take it out now. I cannot predict for sure the direction of the stock market over the next year, but the risk of staying in is higher than usual, and I would nottake the risk that your principle is down 10%. I would rather be safe than sorry and try to find a safe CD than ride out the effects of several quarters of low corporate earnings and continued bad press on skyrocketing foreclosures.
If your investments have a time horizon of over five years, I would perhaps move 30% to cash and stay invested through this turmoil. I would have a strategy of investing into high quality stocks on down days and stay the course through this recessionary period. It is a good time to meet with your financial advisor to review your investments, risk tolerance, and time horizon. As always, I would pay down all credit card debt before I would stay invested in the stock market.