Recently the government confirmed that we are in a recession (2 quarters of negative growth). This has been evidenced by the housing problems, the dramatic drop in the stock market, and the rise in the unemployment rate.
So how does one know when to anticipate an increase in stock market prices? Should one wait until the signs of an improving economy are in place? The answer is NO. The stock market, in the past, recovers a full six months before the "economy" shows signs of life.
So what does this mean to the average investor? To me it says that any money you have that is earmarked for the stock market should be in the market now! No one, and I mean no one, can predict when the economy will improve. Six months, a year, two years or more, no one knows. So grit your teeth put your money in the market.
2 comments:
It seems to me that the only way the stock market can recover is if we invest in it. If everyone waits and holds their money, the market continues to drop or becomes stagnant at best.
I think people too often think the market is an inanimate object that "moves" and then we react. In reality, we cause the movement by our actions. Market conditions are an output of our actions not the reverse...I think.
Chris is correct that people investing in the market is what makes stock price go up. But what makes people want to invest in a company? The answer, except in exceptional or irrational circumstances, is increased earnings by companies.
Right now our economy is in a downward spiral. Fear of losing ones job keeps people from buying goods and services which then translates into lower earnings. When companies earnings go lower less people want to invest and then stock price gets lower. Lower stock prices make people feel less wealthy and to compensate they begin to save more (or borrow less) and with less consumption companies earnings are lower and the cycle continues.
For the last 10 to 15 years the economy was in an upward spiral, fueled primarily by consumer spending, however, consumers were spending money that was borrowed (instead of earned). The stock market, housing prices, and gas prices got to levels that were not sustainable because only so much money can be borrowed (unless you're the Federal government).
What we are seeing now is a correction and it will most likely correct too much on the downside. I don't know when the bottom will occur but once the economy bottoms out it historically has bounced back quickly.
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