As of this writing, all of the major market averages have been declining significantly. The Dow Jones Industrial Averages (DOW) is down 400 points, NASDAQ, 90 points and the S&P 500, 45 points. If you read the headlines right after Federal Reserve Board Chairman Ben Bernanke testified before the Senate Banking Committee today, July 21, 2010, you would think the world is coming to an end. AP prints, “STOCKS FALL SHARPLY...” while Reuters states, “OUTLOOK UNUSUALLY UNCERTAIN….” The fact is that a sluggish economy will benefit smart investors. Smart investors do not act solely on emotion and fear because they are savvy enough to know that harbingers of gloom and doom who write about the stock market, the economy and investments know just as much as Mr. Adam Monk, the stock-picking monkey who reportedly made a lot of money for those who followed his picks. Gloom and doomers quickly reverse themselves the moment the wind changes direction. It is like following the herd which is not hard to do.
The fact is that a sluggish economy will keep inflation and interest rates low making it easier for consumers to purchase. Prices of goods especially large ticket items such as automobiles, home appliances, furniture and computers will be kept in check. The price of real estate had been rolled back to a decade ago in many areas of the country. This, coupled with low mortgage rates should encourage first time homebuyers and real estate investors alike to snap up bargains. A sluggish recovery will put more pressure on this administration to rethink its goal of increasing taxes. A sluggish recovery would prove to this administration that taxing the rich and increasing entitlements is not the way to economic recovery and prosperity. A sluggish recovery means the consumer is not spending as much, as expected in a typical expansion. Hence, the consumer has more money to pay down his debt and to increase his savings. He is poised to spend. He may go out on a spending spree at the onset of any type of good news because in our culture, in a free market society, the consumer has an inherent need to keep up with the Joneses. Another important factor is that many businesses are reporting record profits but are reluctant to invest and hire due to uncertainty about taxes, Europe’s debt crisis and more government regulations. When the uncertainty goes away, the recovery may catch fire quickly and may even overheat. The European bank stress test results to be disclosed this Friday, July 22 may add to more uncertainty which may cause investors to dump stocks. But the savvy investor can look beyond the horizon.
Geithner and Bernanke know what is going on with the economy and they have the power to change things. Bernanke told lawmakers today, "If the recovery seems to be faltering, we have to at least review our options, but no further action is planned for now because the economy is still growing”. Geithner has the power to counsel President Obama with regard to taxes and he must have told Obama that the private sector does not like tax increases. I predict that this administration will take appropriate action if signs point to another recession which President Obama will have to own. He will not let this fragile recovery slide back into a recession because that would most likely seal his fate as a one-term president. To me, fixing this economy is as simple as following what JFK, Reagan and Clinton did, and that was to reduce corporate and capital gains taxes. Obama may be compelled to follow the same route if the economy appears to be sliding back into a recession and once again, that would be good for investors.
If this recovery continues to be sluggish but does not fall back into a recession, stock prices will continue to rise even though they may turn sideways some days and drop halfway to the floor other days. Yes stocks will rise and fall but they will not sink to recession level prices unless there is another recession. Economics 101 and plain common sense.
This article is not intended to provide financial advice. Please consult your financial advisor before acting on any advice provided herein.
Any opinions and views expressed herein are the sole responsibility of the writer.