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Ask Julie
Survival SKILLS
What is going on with the economy,and can you benefit from it?
By Julie Stav
Let's face it, you will hear and read the word recession many times in the next few months, so you might as well make it your business to find out what it really means and how it will affect your pocket.
First, a loose definition of the word: A recession occurs when the economy of a country shrinks over two consecutive quarters. But, how do you measure the size of a country’s economy? As you can imagine, there is ample room for interpretation among economists when it comes to measuring something as vague and with so many moving parts as a country’s economy. That’s why the final call of whether we are in or out of a recession is reserved for the 87-year-old National Bureau of Economic Research, a non-profit group based in Cambridge, Massachusetts.
The NBER, as it is commonly known, is made up of 600 academic economists, and though their decision is final, it usually arrives well after the fact. The last recession began in March of 2001 but the NBER did not announce it until November of that year. So, we may not have the official word of whether we are actually in the midst of a recession for months.
With such a track record, it would behoove you to identify the characteristics of a recession and consider the final decision of the experts as a confirmation of your suspicions.
Here are a few of the symptoms that make up a recession:
• A drop in the stock market: this point deserves a definite check mark next to it.
All three indices—S&P 500, Dow Jones Industrial Average and the Nasdaq—have been battered lately and, along with them, most of the sectors in the economy, including the non-cyclical ones such as utilities and health, which can usually hold their value better than other sectors under such pressures.
• A decline in housing activities: another check for this category. The interest rate resetting on variable mortgages has resulted in foreclosures without precedent.
• Long-term-interest rates falling below short-term-interest rates: this is called an inverted curve because it goes against the norm of receiving a higher rate for committing your money over a long period of time. A check here too.
• Increased unemployment rate: according to Goldman Sachs, the unemployment rate, averaged over three months, has always risen at least 0.3 percent, either before or during a recession. This mark was crossed last month. Check.
But not all signs point to a recession. One of the key components in the popular definition of a recession is missing: The growth of the index that measures the Gross Domestic Product (GDP) has not decreased over two consecutive quarters. The GDP measures the value of all the products and services produced in the United States.
But just because we may be in a recession does not mean that you cannot make money in the stock market. There are three ways that investors can take advantage of falling prices:
• Short selling: Profits are made by the investor who sells short when a stock continues to decline in value. This technique is risky and should only be used by more experienced investors.
• Value Investing: This method involves looking at a fallen stock as a bargain waiting to be scooped up. I suggest you consider value mutual funds rather than choosing a single stock.
•Long-term-investor: This investor knows that this too shall pass and continues to buy his mutual fund (not his individual stocks!) as usual, taking advantage of dollar-cost-average.
So there you have it, a quick look at recession and a money-making strategy to help you survive it while you stay within your comfort zone.
Listen to Julie Stav’s
radio program Monday through Friday on your
local Univision radio station. For more
information visit
www.JulieStav.com
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