Trying to ascertain a realistic assessment of the current economic situation is tenuous, at best, as we begin 2009. Finding a balance between the people who believe we are actually experiencing financial Armageddon, and those who perpetuate that fear for political advantage, is where I find myself at this point in time. History is always a good place to look to determine if a financial panic has some precedent we can use to guide our decisions.
The US economy has been in recession since December of 2007, according to the National Bureau of Economic Research, and unemployment will continue to increase well into 2009. This recession could be the worst since the 1973-75 and 1981-82 recessions, and possibly the worst since the Great Depression. If you look in the right column , there is a historical list of various recessions and their duration. While not attempting to downplay the severity of the current economic slump, it is quite evident we have not reached the depths of the Great Depres-sion, despite sensational media reporting.
Below is a list of recessions, since 1926 and their duration.
1929-1933, 43 months in duration (Great Depression).
1981-1982, 16 months in duration.
1973-1975, 16 months in duration.
1937-1938, 13 months in duration.
1926-1927, 13 months in duration.
2007-2008, 13 months in duration.*
1970, 11 months in duration.
1948-1949, 11 months in duration.
1960-1961, 10 months in duration.
1953-1954, 10 months in duration.
Government response has been intense. Whether the stimulus planned can jumpstart the economy remains to be seen. There are many who believe government stimulus is a waste of taxpayer money, that it will go to family members, and friends of the politicians who sponsor legislation, and our children will be left with European style taxes for generations. It seems that the taxpayers in this country are psychologically wrestling with the choice between free market capitalism and the safety net of increased socialism.
As I mentioned earlier, I tend to look for balance between the multitude of opinions, so I think we will avert disaster, but the price will be more government and a period of slower growth. It is not possible for us to have low taxes and deficits of a trillion dollars for very long. For now, however, even people who believe in free markets realize the government does have a role to play when panic grips our financial system. This is especially true when government policies, such as "affordable housing initiatives" and Corporate Average Fuel Economy (CAFÉ) standards have exacerbated problems for certain industries. The cost down the road will be high, especially as taxpayers weigh the option of further nationalizing the health care system.
The markets have been humbling to many money managers this year, and as you know from the end of the year statistics, quite dismal. The Dow Jones Industrial Average ended 2008 at 8,776.39, which is a decline of 33.84% from the 2007 close of 13,264.82. The S&P 500, which reflects the broader market, was down 38.49% from its 2007 level of 1,468.36 and closed at 903.25. The NASDAQ index dropped from 2,652.28 to 1,577.03 to end 2008 with a 40.54% loss.
In the next article, I discuss ways to survive and thrive in this market. The next year or so is a buying opportunity!
INVESTING DURING THE RECESSION
I stated in Market Watch that the markets humbled many money managers in 2008, and with this downturn comes the chorus of concerns about not being able to make money in the stock market, because it is too volatile. At first glance, the argument seems plausible, because if you look at the indices, and their returns to date, they are abysmal. In fact, on November 20, 2008, the S&P 500 fell to a low of 752.44 not seen since the 754.72 close on April 15, 1997. At that point the S&P 500 was 51.92% lower than the high set in October 2007. From November 20 through the end of 2008, the S&P 500 gained back 20%.
There is no doubt the stock market has been a real roller coaster ride, and the 2008 lows will probably be tested in 2009. When you analyze the numbers, and understand how rapidly the market can recover, you begin to understand knee jerk reactions are not the best responses to this volatility. In fact, I am of the opinion the only way those of us who work for a living have a chance to build wealth is to continue to save and stay invested during this roller coaster ride.
Furthermore, while it is true there was a market low of 51.92% in the S&P 500 in November, those of us who kept their investments didn’t realize that loss, except psychologically. These gains and losses are temporary paper fluctuations that are only realized when you sell. Variable annuities can protect future income, if you are concerned and close to retirement.
With the markets off more than 30%, every share you buy in your 401k, 403b, ROTH IRA, IRA, 529 plan, brokerage account or mutual fund is being purchased at a discount. I feel this buying opportunity will continue for at least 6 months and possibly longer. When the markets recover, as they always do, all of your old shares, plus the new ones you purchase will bring your account to a higher level than it was before the recession.
Click on the graphic to make it larger if you have difficulty viewing it!
It is true nobody has a crystal ball to tell us exactly when the markets will recover, but once again history is where I usually go to help me understand what we are experiencing and how best to survive and thrive. The graphic above helps put some of the current conditions into perspective. The first graph depicts the recent job losses. While the 2,589,000 jobs lost in 2008 were the most since 1945, the percentage of jobs lost was only 1.88%. This compares favorably with the 2.34% of jobs lost in the 81-82 recession.
The second graph shows that unemployment peaks some months after a recession has ended. The recessions are noted by the shaded areas and the line depicts the unemployment rate. Since trying to time these trends is an inexact science, it is my opinion patience, discipline and calm are the keys to building wealth.
PROTECTING YOUR ASSETS IN A DOWN MARKET
Many of you have invested in the Transamerica and MetLife Annuities, so I want to remind you, once again, about the Guaranteed Minimum Income Benefit. This rider protects the assets so your account will continue to grow in a down market. Look for the line item GMIB, Income for Life or Managed Annuity Program to ascertain this value.
While the market value reflects the turmoil in the stock market, the beauty of these products is their insured value during times of market upheaval. These products help to protect your assets and are an especially good investment for retirement assets. They are great for anyone who wants some insurance on their investments, especially if you are going to be drawing income in the near future. Contact me for an appointment or more information.
John Kaighn
Jersey Benefits Group, Inc.
Investment Advisory Services offered through:
Jersey Benefits Advisors
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257
Email: kaighn@jerseybenefits.com
Http://www.jerseybenefits.com
Securities offered through:
Transamerica Financial Advisors, Inc.
A registered Broker/Dealer
1150 S. Olive St. Suite T-25
Los Angeles, CA 90015
800-245-8250
Member FINRA & SIPC
Third Party Administration and Insurance Services offered through:
Jersey Benefits Group, Inc
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257
Email: kaighn@jerseybenefits.com
Http://www.jerseybenefits.com/
All opinions expressed in this newsletter are solely those of John Kaighn & Jersey Benefits Advisors, formerly known as Kaighn Financial Services.
