The “R” Word – Winter 2008
In recent weeks you may have heard the “R” word bandied about. When discussing the economy, it is a dirty word! The mere mention of recession
is enough to put fear into the hearts of investors, and the expectation of recession can become a self—fulfilling prophecy: If enough investors and consumers become pessimists, they can bring about the very thing that they most feared.
There is no shortage of analysts who are convinced that we will have a recession this year.
Some are even claiming that we are already in a recession, but that is not the case. A recession is defined as two or more consecutive quarters of negative GDP growth. If we are already in recession, 4th quarter 2007 GDP growth must have been negative. In fact, GDP growth screamed along at a torrid rate of 4.9% in the third quarter, and is expected to come in at about 1.2% in the 4th quarter.
Might we have a recession in 2008? Sure, the combination of sky—high oil prices, disappearing housing equity, and the credit crunch may in fact lead to a recession. In my opinion the probability of a recession this year is in the 30% to 40% range. I think it more likely that we will have slow economic growth (maybe about 2% GDP growth), but will avoid a recession this year.
If we could predict recessions, we would sell your equities and move 100% into fixed income. Since forecasting is a fool’s game, we do the next best thing: We strive to balance your portfolios sufficiently into fixed income and alternative investments so that when the market falls, you will have sufficient stability to stay the course. Only by remaining invested can an investor participate in the long run wealth generator that is the U.S. stock market.