Economy has its way with marketWritten by Dock Treece | | email@example.com
No one can say the end of February wasn’t exciting. The stock market finally decided to take a more critical look at the economy and didn’t like what it saw.
The economy has been slowing for some time, but the stock market has ignored economic conditions as it moved higher. But by Feb. 27, the economic conditions suddenly seemed to matter.
A one-day drop of approximately three percent in the Dow Jones Industrial Average made investors sit up and take notice. Suddenly it seems everyone is questioning the strength of the economy. Even Allan Greenspan, former Federal Reserve Board chairman, said the economy could slip into recession by the end of the year.
We have said several times since last year that the inverted yield curve was warning of a slowing economy this year. What will Ben Bernanke, Federal Reserve Board chairman, do if the economy starts to slip into recession?
I believe the answer to that question will be the key to successful investing this year. Previous comments made by Bernanke led me to believe that if a recession becomes apparent, he will reduce short-term interest rates and increase monetary liquidity (money supply) to cushion the recession.
Those actions would impact the economy and markets in several different ways, the most important being they will reduce the effects of a recession. However, the side effects of those actions will be of paramount importance to investors.
The effects will be: lower short-term interest rates will cause the dollar to weaken; a weaker dollar will cause long rates to rise; higher long rates will be bad for the housing market, bond prices and corporate profits; and excess monetary liquidity will cause inflation.
Put it all in a blender, mix it up and what do you get? Stagflation. Remember that term from the 1970s?
The key to investment success is not what the economy does, but what you do in response to those economic conditions. If you hold on to the same investments as economic conditions change, you will probably not be happy with the results. But, if you change your investment strategy to match the economic conditions, you can do well.
Most investors today don’t have a vivid memory of the investment climate in the 1970s, but a walk down memory lane could serve one well. Remember that the DJIA traded between the high established in 1972 and the low of 1974 until 1982, the price of oil tripled from 1972 to 1980, the price of gold went from $150 per ounce to $850 per ounce and the average price of a home went from $33,000 to $100,000 from 1970 to 1980.
In summary, what we refer to as “hard assets” did very well in a decade where stagflation was a dominate economic condition. And the best news of all was, after the stagflation period was over, we began 1982 in a bull market in stocks that lasted for 18 years, one of the longest bull markets in history.
Remember the above is nothing more than my opinion and should not be used to determine your investments without your personal verification. The above was written for entertainment purposes only.
Dock Treece is a stockbroker and owns Treece Financial Services Corp., www.treeceinvestments.com. The above information is the expressed opinion of Dock Treece and should not be used without outside verification.