Panic and fear are everywhere in early 2008. An economic recession in the United States is now the topic on everyone's mind. Most of the world's stock markets have already lost more than twenty percent of their value in the last couple of months. This dramatic drop in stock market values signals a new bear market for domestic and international equities.
Many pundits on the financial channels blame Federal Reserve chairman Ben Bernanke for this economic downturn. The belief is that the Fed did not lower interest rates enough in response to the housing lenders sub prime mortgage problems in 2007. Indeed the massive write-off's of bad loans by Citibank and other mortgage lenders are enough to give anyone pause.
Recently, to head off an economic downturn, the Bush administration proposed an economic stimulus package of tax rebates to increase the consumers' ability to spend. Consumer spending is vital for the United States to avoid a prolonged economic downturn. The Congress (which is now back in session) has promised fast bi-partisan consideration to that stimulus package as soon as possible. Giving back taxpayers their money, without having to cut government spending, is what politicians love to do, especially in an election year. On the campaign trail in the Presidential election in 2008, the focus has shifted away from the war in Iraq to the state of the faltering United States economy.
So, what can we expect during the recession of 2008? First, it helps to know exactly what one is. A recession is defined as a period when real gross national product (GNP) has declined for at least two consecutive quarters. How long this recession will last is anyone's guess. However, history does tells us that the average recession since 1945 in the United States has been an event that has lasted about ten months.
With a recession looming, the Federal Reserve will dramatically lower interest rates to stimulate the economy in the first few months of 2008. A recession in the United States will lead to a worldwide slowdown in economic activity. Oil prices and commodity prices will at least temporarily fall with reduced demand. People will lose jobs as the pace of business slows, leading to a rise in the national unemployment rate. Housing prices will continue to decline as has been the case during the better part of the last year. The stock market decline will continue until the market sees evidence of the beginning of a new period of business expansion.
The psychology of fear plays a major part in all recessions. Job insecurity and the declining prices in people's homes and investment portfolios are not a formula for anything else. Americans may remember the quote of Franklin Delano Roosevelt. He said, " The only thing we have to fear is fear itself." before America came out of the Great Depression early in the twentieth century.
The truth is that recessions are unavoidable. They happen as a normal part of the business cycle. Hopefully this recession will be mild and a recovery will begin in the third quarter of 2008. The good news is that recessions do provide opportunity for the long term equity investor. Those who have a long term investment time horizon should consider that equities will be on sale in 2008.
So what should we do to prepare for an economic recession in 2008? It is a time to pay off debt and be financially conservative. We should build an emergency fund in case of job loss. We should be awaiting an opportunity to put excess investment capital for the long term to work. It is also an opportunity to see how the presidential candidates respond to the economy's problems on the campaign trail.
A recession does not mean listening to media hype and selling investment assets in a panic. For the long term investor, it is certainly not the time to sell investments in equities. Remember the words of Franklin Delano Roosevelt that fear is the real enemy in a recession. "Buying low and selling high" in the stock market really means controlling and conquering this fear. History tell us that the economy should be much better later this year and investment markets are outstanding performers in the years following recessions.
Therefore, to properly navigate the U.S. recession of 2008 is to control fear, be financially prudent, create an emergency fund, and look for attractive investment opportunities with long term investment capital.
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