Corporate earnings are beginning to come in for the 4th quarter of 2008 and as expected, they are not pretty. No huge surprises are coming out there, but actually seeing the figures, as opposed to imagining what they will be, is somewhat akin to throwing ice water in your face in the morning. It brings a sense of immediacy to you.

Also today, the Commerce Department reported December’s retail sales declined 2.7%, versus the -1.2% consensus figure expected by most economists. The media is having a field day touting the Commerce figure as, “more than DOUBLE the decline expected,” and the markets are reacting negatively.

So far, there is nothing happening that would indicate that an economic recovery won’t begin during the second half of this year, as is anticipated by most economists. But we are currently in a period with lots of potentially negative news coming at us, all of it looking backward at last quarter’s economic performance. And human nature being what it is, we tend to extrapolate the recent past into the foreseeable future and the gloom becomes pervasive.

Expect to see continued daily reports coming out telling of profits declining last quarter, more layoffs and more company bankruptcies. This is not welcome news, but it is the norm at this point in the typical recession. We will also get the first of three government estimates of 4th Quarter Gross Domestic Product (GDP) on January 30th, and if it comes in below expectations, that could move the markets downward.

There will also likely be very positive reports coming out, especially with respect to the steps soon-to-be President Obama and the new Congress will be taking to stimulate the economy. The most recent figures are upwards of $1 trillion in new federal spending and tax reductions, plus the release of the last $350 billion of the TARP Bailout funds. That is whole lotta new money getting thrown at the economy and it can’t help but be positive in the short run.

The main thing I would like you to take away from reading this update is an understanding that the markets may still have more declines ahead of it before they get on a more solid and lasting upward trend. I also want you to ask yourself today, while we are still in a relatively calm period, if you are willing to endure more stock market declines before we get to what I call “the promised land.” If you are not, then please let me know right away. We can limit your downside, but at great risk to your potential upside, because deciding when to get back into the stock market is a far more difficult decision than getting out of it is.

It is really important to avoid having anyone sell out close to a new market low because their emotions are getting the best of them. As I have said many times, I feel confident that just about all of you have the wherewithal and the proper portfolio structure to make it through this period intact and be able to recover from it. The vast majority of you have ample cash and safer money available to fund your withdrawals from several years, allowing the stocks you own to remain invested and fully participate in the eventual recovery. So I believe selling stocks you currently own is would be a big mistake.

Since we are on the topic of the unprecedented federal money that has and will continue to be thrown at the economy, I want to take this opportunity to share some additional thoughts with you. I’m sure you are all familiar hearing that we are in the worst economy since the Great Depression, and that if we don’t do these massive stimulus programs, we risk things being much worse. The President-elect, Congress, and certainly the media have been consistent with that story. And I’m sure many of us just accept that premise without question, because we do see a lot of bad news everywhere we look.

I decided to take a look to see if I could verify what we are all hearing. I checked the websites of the U.S. Commerce Department and the Bureau of Economic Activity, to see if this is, in fact, the worst economy in 80 years. The results may surprise you.

First, I looked at unemployment. The current rate is 7.2%. The rate during the Great Depression got down to 25%. In the interim years, unemployment dropped below today’s 7.2% rate many times. For instance, take a look at some other past increases:

  • 1958: 7.5%
  • 1974-77: above 7.2%, peaking at 9.0%
  • 1980-88: above today’s rate, peaking at 10.8% in 1982
  • 1992: 7.5%​

So from an unemployment perspective, the current economy is nowhere near other periods over the last six decades.

Then I looked at Gross Domestic Product (GDP). Economists expect 4th Quarter GDP to come in at -5.0% or so. How bad is this, compared to history? Let’s explore the past:

  • 1949 (1st Quarter): ​​​- 5.8%
  • 1953 (4th Quarter): ​​​- 6.2%
  • 1953-1954 (4 consecutive quarters): ​- 8.6%
  • 1957-1958 (4 consecutive quarters): ​-11.6%
  • 1958 (1st Quarter): ​​​-10.4%
  • 1960 (4th Quarter): ​​​- 5.1%
  • 1960-1961 (4 consecutive quarters): ​- 4.1%
  • 1979-1980 (4 consecutive quarters): ​- 6.0%
  • 1980 (4th Quarter):​​​- 7.8%
  • 1981-1982:​​​​ -10.6%
  • 1982 (1st Quarter): ​​​ – 6.2%

Clearly, the current recession is nowhere near as bad as some of these previous recessions were. If you compare inflation rates today with prior periods, we all know we’re in a relatively benign period. In fact, economists are more worried about deflation than they are about inflation.

Corporate bankruptcies and bank failures have all been much worse in the past than they are today. The only condition I can think of that we have today and that we have not seen since the Great Depression is the decline in housing prices and the level of foreclosures.

All in all, the claims we have been hearing about the severity of this current recession just do not ring true, at least to me. Things have been worse, and much worse, multiple times in the last several decades. Why the market is down so much this time is a bit of a mystery. It’s possible that it is caused by the forced selling by hedge funds and institutions that need access to liquidity. Another potential explanation is the increasing number of funds that seek to double the returns of the markets, both up and down, which could be adding to the overall level of volatility in the marketplace.

Whatever the reason, I hope you can see that we have been in similar situations before and have always been able to both survive them and return to even greater levels of prosperity afterward. Always.

And there is every reason to believe that this time is no different than all prior difficult times. Keep your spirits up.

 

Calling all neighbors in the Alamo, CA area and beyond! You work hard for your money, and now we want to help make it work for you. At Del Monte Group, we offer out-of-the-box wealth management planning that is clear and actionable at every step. If this sounds like the type of financial support you need, schedule an appointment to meet with Richard or Angela today. Visit APlaceOfPossibility.com/Calendar to get your meeting on the books. Need more help or have another question? Feel free to contact our team by calling 925.736.6410 or sending an email to Info@APlaceOfPossibility.com.

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