Friday, November 16, 2007

Black Friday Looms Large

As we head into the final weekend before Thanksgiving, poised for Black Friday and all of its ramifications, a bewildering array of terms are bombarding investors from various sources on a daily basis. Cutting through all of the clutter can be a daunting task as we try to ascertain the direction of the US economy. Terms like recession, credit crunch, housing debacle, inflation and that scourge of the 1970's know as stagflation are on the lips of many journalists, commentators and economists as this very mature expansion plods along midway through the 4th quarter of 2007.

Meanwhile, the race for the White House is in high gear, while Congress drags its feet searching for a solution to fix the Alternate Minimum Tax trap before it ensnares too many middle class voters this year. Gold is at an all time high, home values are imploding, food prices are soaring, the dollar is getting pummelled and oil prices are significantly higher now than in January, although at just under $94 a barrel, the surge toward $100 a barrel oil seems to have abated somewhat. Whether this is a peak in a commodity bubble, or a plateau before another another leg up is anyone's guess at this point. Suffice it to say there are enough things to worry about and that has been evidenced by the volatility of the major indices recently.

At this juncture it is difficult to say with any certainty whether or not the economy will weather the current circumstances and keep growing, so it is probably better to try to keep an eye on the big picture, rather than focus on the day to day sound bites. According to Peter Coy of Business Week, the big picture consists of several indicators which should help us keep a pulse on the direction of the economy through 2008. First of all if unemployment remains under 5%, consumers should be able to continue spending. If inflation stays benign, the Federal reserve will be able to make further rate cuts, if not on December 11, then at some future time if economic growth stalls. The holiday shoppping season is extremely important, and big retailers are already discounting prices. Once again, the consumer is a large player in the retail story and the impact of falling home values could put a damper on spending plans. However, if lower housing prices entice buyers back into the market, then that would be a good thing.

Another indicator to watch is the willingness of banks to continue lending. Already standards have been tightened, but if banks cut back further on small and midsized businesses, economic growth could be negatively impacted. Finally, Wall Street's reaction to all of the economic uncertainty will be the focus of quite a bit of attention, because a large drop in the stock market preceded the 2001 recession by a year. At the present time there has been no such drop, but there has been more than one 300 plus swoon lately. Of course 300 points up or down based on a 13,000 point Dow Jones Industrial Average is only 2.3%, just to keep things in perspective!

So my advice for the immediate future is to enjoy your Thanksgiving turkey, focus on the big picture and continue to dollar cost average into your accounts. The volatility provides buying opportunities for those of us who remember that a drop in the stock market is like buying retail items on sale. While painful, recessions are not the end of the world and I certainly do not believe we are by any means teetering on a precipace ready to plunge into the abyss. With the election year politics in full swing, all of the candidates have their own recipe for the salvation of this great land. Thankfully, the founding fathers created a union that has endured much folly by politicians and I think we will survive our current set of circumstances. Maybe this time the bankers will get it right!

John Kaighn

Jersey Benefits Advisors

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