To Be, Or Not To Be, That Is The Question

If someone is asked to quote a line from Shakespeare, the title of this cover article is generally the one selected. It remains one of the best known lines in all drama and literature. The meaning, as expressed by Hamlet at the time, was a question of whether it was better to live or die. Clearly this is much more melodramatic than how the quotation is often used today! So with an allowance for poetic license we felt that it was a title that most appropriately represents the economic issue affecting our economy as we enter the New Year. The issue is the possibility of recession.

Market analysts and economists are virtually split on whether or not our overall economy is ready to slide into recession or maintain reasonable growth to keep the economic headwinds moving forward. Obviously the result of that direction will have a correlation with the performance of the stock markets in 2008. Our best guess at this time can only be that we will most likely need to navigate choppy waters for some time yet. For that matter, we are coming off a year that was not for the faint of heart. On the surface the year end results were not so terrible with the primary market indexes all in positive territory. The Dow Jones Industrials were up 6.43%, the Nasdaq Composite up 9.81%, and the S&P 500 was up 3.53%. However, what we lived through was a sub prime mortgage meltdown, banks shutting down credit, a slowdown in jobs growth, falling housing prices, and inflation fears.

The good news was that we survived those issues with the markets holding on to gains largely acquired earlier in the year. The bad news... we are starting 2008 with all the same concerns on the table! There are a number of things we will need to watch. One of the biggest unknowns is the condition of the short term credit markets which business relies on for their immediate funding needs. Many banks have been carefully guarding their reserves and have become overly cautious on lending. Sub prime mortgages, those high risk home loans, have worked their way into investment portfolios of financial institutions worldwide, causing havoc in the global credit markets. Stock market valuations for the financial sector have been "hit" very hard since the problem surfaced in mid summer. Whether the full impact has worked its way through the financial markets remains to be seen.

Housing statistics will be another key indicator. A major problem appears to be an excess of unsold homes that are lingering in inventories. The National Association of Realtors reported that in October of last year the supply of homes for sale was at its highest level in twenty two years. This spills over to a December report of the National Association of Home Builders indicating that single family housing starts were down fifty percent from a record high at the beginning of 2006. Housing has been a drag on the economy for a few years now and the hope is that a bottom can be reached during 2008. Unfortunately, the bottom will most logically be reached through price cutting which reduces homeowner equity which has been a source for consumer spending for quite some time.

Then there will be the issue of crude oil prices and its effect, if any, on core inflation rates. It was just twelve months ago that crude oil was trading at $51 a barrel, but it became a record smashing year with oil peaking at $99 a barrel in 2007. Most energy experts are expecting the price to be in the triple digit range during 2008. The good news has been that the global economy has demonstrated the ability to adjust to $80 and $90 prices without killing economic growth. The question becomes can growth continue at even higher anticipated oil price levels?

A bright spot in the economy has been the growth of U.S. exports. As the dollar has been weakening, U.S. producers have been gaining a greater share in the worldwide market place. The positive development from this is a reduction in what has been a huge current account deficit with our international trading partners. The hope is that this trend can continue as it can be the major stimulus for ongoing economic growth.

In summary, we are not attempting to make any predictions about the investment markets as there are so many issues "in play" as mentioned above. Oh, by the way, did we mention this is a presidential election year? It will be necessary, as difficult as it may be, to distinguish the difference between news chatter and real facts in trying to determine market direction. As for that dreaded R word(recession), there just is no better way to express the dilemma than how Shakespeare articulated it....To Be, Or Not To Be, That Is The Question. In the meantime, our best wishes to all for a Happy, Healthy, and we would add, Prosperous New Year!

Was this article helpful? - Print it! by clicking on the printer icon bellow and pass it around, send it by mail just by clicking on the email icon or just post it on your facebook wall or twitter page...
Share the wealth!!!