Recession over: Now what?
Alan Greenspan finally came out and said it. The recession is over, he told a Senate committee on March 6th.
The markets celebrated by selling off. Some days it doesn’t pay to get out of bed.
New York did rebound the next day, although the Dow had given up much of its early morning surge by the close. The TSE fell further, however.
The reason for the investor retreat was the fear that interest rates will start to rise more quickly than had been expected when the Fed chairman (or, more precisely, the media) was placing greater emphasis on the weakness of the recovery, rather than the ending of the brief recession.
Sure enough, bond yields rose right on cue, knocking back bond prices. And on the day after his statement, three of the big banks, CIBC, BMO, and TD, raised mortgage rates by as much as 75 basis points (3/4 per cent).
That’s a big jump in one mo.
Companies under pressure
Certainly all the economic signals are brightening, capped by the better-than-expected unemployment figures that came out at week’s end in both Canada and the U.S.
But what the economists are seeing is a lot different from what business leaders are experiencing. In fact, some U.S. CEOs commented last week that despite what the numbers were suggesting, their companies were still under pressure.
The bottom line is, while we’re no longer losing ground, we aren’t gaining rapid forward momentum, at least not yet.
In my view, the jump in interest rates last week looks premature.
Next page: Don’t sit on cash
Don’t sit on cash
That said, the combination of improving economic indicators and strengthening markets reinforces the position I have been taking for some time: Do not keep sitting on large amounts of cash.
As of the market close March 8th, March was proving to be a good month for all the major indexes.
The Dow at that point was up 8.5 per cent month-to-date, the S&P 500 was ahead 6.2 per cent, and the Nasdaq Composite had gained 6.1 per cent.
The TSE 300 rally was weaker, but the index was still 5 per cent better than where it was when the month began and was finally in the black year-to-date.
Overseas markets are going gangbusters, with the Nikkei up a startling 22.7 per cent so far this month, to March 8th, despite confirmation that Japan has fallen into its third recession in a decade
Most European markets are also performing well, with Frankfurt’s DAX Index ahead 10.8 per cent thus far in March.
Upward trend overall
Investors around the world seem to have decided that, if happy days aren’t here again, they’re just around the corner.
Even President Bush’s approval of hefty tariffs on U.S. steel imports, which will certainly hurt European and Japanese producers, didn’t stop the overall upward trend of those markets.
Good for investors
All this is great news for investors who have been despairing over the tattered state of their portfolios.
But it does not mean that you should suddenly throw caution out the window and let greed overtake fear. A balanced mixture of both emotions is healthy right now.
Continue to deploy cash reserves, but only buy securities that are reasonably priced. I have said it before, but I reiterate: Do not overpay for anything.
If you miss a good stock as a result, don’t fret. There are plenty more around.
From the March 11th edition of the Internet Wealth Builder.