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| | A Look Ahead | |
| By Elliott H. Gue | ||
There was a time when a triple digit move in the Dow Jones Industrial Average was considered a rarity. Now, it's an everyday occurrence; in 38 out of the past 45 trading sessions, the Dow has gained or lost more than 100 points. That volatility is a symptom of the extraordinary market and economic environment we currently face. Global markets have just been through one of the sharpest declines in history. Since Sept. 1, the S&P 500 has fallen 30 percent and is off 39 percent over the past year. And commodity markets have been no picnic either, with the CRB Commodity Index soaring to record highs in the first half of the year only to fall sharply after July 1. The market continues to face headwinds, but there's a silver lining: The most dangerous and panicky markets always offer investors the best opportunities. In mid-October, Warren Buffett penned an op-ed piece for The New York Times entitled "Buy American. I Am." To summarize, Buffett revealed his one simple rule when buying stocks: "Be fearful when others are greedy and greedy when others are fearful." There's no doubt that investors are fearful right now and are pricing in a glass-half-empty outlook for the global economy. As a result, valuations for many high-quality stocks are compelling; I suspect two years from now, we'll look back on October/November of 2008 as an outstanding buying opportunity. This isn't the time to panic but the time to rationally evaluate the prospects for the economy, stock and commodity markets with an eye toward taking advantages of opportunities in coming months. Here's a rundown of where we are and what to look for in the months ahead. The US Economy There's no doubt that the US economy is in recession and has been since late 2007 or early 2008. I suspect this recession will be longer than either the 2001 contraction or the down-cycle of the early 1990s. Don't be fooled: The official definition of recession is not two consecutive quarters of declining gross domestic product (GDP). Rather, the start and end dates for recessions are set by the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), and NBER takes into account a wide variety of economic indicators in making its determinations. My favorite measure of US economic activity is the Index of Leading Economic Indicators (LEI). The LEI is nothing more than an index that summarizes the performance of 10 key economic indicators, including building permits, stock prices, interest rate spreads and manufacturing orders. When the year-over-year change in LEI turns negative, it signals the US is in recession. Although no indicator is infallible, the LEI has accurately flagged all of the recessions since the '60s. Since the LEI turned negative in late 2007 and shows no real sign of a turn for the better, I'd conclude that the US has been in recession for roughly one year. Click here to continue reading | ||
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Pay Me Weekly - A Look Ahead
