Saturday, November 24, 2007

Is A Recession Coming?

The answer is yes. The unknowns are when and for how long:-) The current housing bust, credit crunch, and collateralized debt crisis are factors pointing towards recession. In addition, consumer spending is declining. Offsetting factors including continued strong business results, a strong global economy and Fed Monetary policy. I believe Ben Bernanke and the Fed now realize the need for further rate cuts, which they will do in the next few months. Overall, I think the the offsetting factors will delay but not prevent a recession. My hope is that the delay will be at least 18 months and soften the eventual recession, leading to a quick recovery.

Here's an interesting article dated August 31, 2007, by Jim Kingsland at Seeking Alpha titled, "Are We Headed Towards a Recession?" It notes,"A text book definition describes a recession as two consecutive quarters of falling GDP. The National Bureau of Economic Research, also known as NBER, goes a few steps further: 'A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.' " In addition, the article shares viewpoints by several economists on both sides of the question. Mr. Kingsland concludes that a recession is not far away.

Based on a recession scenario being likely in the next 1-2 years, I will be more cautious about putting new funds in the stock market, and consciously maintain at least 35% of the portfolio in cash, bonds and CDs. In addition, I will start identifying stocks for potential short positions, should an extended market decline occur.

For more on Reflections and Musings, check back every Saturday for a new segment.

Photo Credit:, Clara Natoli

This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC


Brip Blap said...

What do you think about diversifying to European/other international funds? My wife and I have decided to curtail any future US investments in favor of overseas investments for the time being. I'm thinking more and more that this is the conservative approach to investing - NOT to invest in the US.

Barry Hughes said...

I have 65% of my portfolio in 2 International funds and they are declining in stride with my US mutual funds. How can this be with the higher priced Euro's etc.. Shouldn't this be a safer place right now?

Super Saver said...

@ Brip Brap and Barry,

I believe investing in foreign companies (or US international companies with major global presence) is a good diversification strategy. I think foreign countries will be where the majority of economic growth will occur in the future.

However, non-US investments may also be impacted by a US recession if the overseas companies are partly dependent on the US for revenue, which many are. Also, if the recession risk is (or perceived to be) global, foreign stocks will also be affected.

I have about 10-15% invested in foreign stocks and that portfolio has declined about the same as my US and international stocks during the past couple weeks :-(