A Shaky Economy: Should You Invest Now?

Open the newspaper or turn on the TV, and you’re bound to see a recurring stock market theme: DOW UP…DOW DOWN! S&P ON A ROLLER COASTER RIDE! So you ask yourself, “What the heck is going on?” Here’s the scoop…analysts, commentators, and equity investors are beside themselves with euphoria as the U.S. stock market rises and falls on a weekly basis, and this market is creating a lot of wealth for those who are in the business of “financial news and analysis”.

Keep it in Context
Even though the U.S. stock market rose to record levels not long ago, these metrics are not the end-all-be-all measures of our nation’s financial status. Let’s not forget the other (currently less favorable) economic indicators and their effects on our economy:

• Consumers are saddled with enormous levels of revolving debt
• Real wage growth is stagnant
• Personal savings rates are at 70-year lows
• Home-foreclosure rates are accelerating
• Oil prices are at record highs
• Our nation is bogged down in a costly, unpopular war
• Health care and college tuition costs are easily out pacing inflation

This all adds up to a perfect storm of reduced consumer spending. In other words, the amount of disposable income the average American has available to spend on products and services is quickly declining beyond expectations…just ask J.C. Penny Co. and Starbucks.

Some might dismiss these consumer statistics as insignificant, particularly since corporate profits remain strong. But let’s not forget that consumer spending accounts for two-thirds of our nation’s Gross Domestic Product (or GDP). GDP is one of the ways we measure the size of the U.S. economy. So when consumer spending slows, guess what? You got it…the U.S. economy contracts. This contraction is an indicator of negative economic growth, also known as recession.

Now before you go running outside to see if the sky is falling, please note that we are not predicting a massive downturn in U.S. stock market stability. We are, however, suggesting that the national economic picture may not be as rosy as pundits, commentators, and Wall Street experts would have you to believe.

Stay Focused…and Cautious
As investing sage Warren Buffett once said: “Be fearful when others are greedy and greedy when others are fearful.” With investors now seeing dollars signs everywhere, market greed is spreading like wildfire. Buffett’s wise words urge you to remain prudent and to go forward with your eyes wide open, particularly as the ever-hungry market mavens continue to beat the drums of higher…higher…higher.

Where Does the Market Typically Go After Sustained Highs?
Mark Arbeter, Chief Technical Strategist at Standard & Poor’s chimes in on this point:

“If history can serve as a guide…we will likely see sub-par price performance in the first month following the setting of a new high, and then find above-average price appreciation in the three and six months after. In addition, the next market top usually occurred around three years after the setting of a record high.“

Once again, do not take Mr. Arbeter’s words as the gospel. He may be right…he may be wrong. But nobody–and we mean nobody–knows at what levels our stock market will be one, three, or ten months from now…and if they did, trust us, they wouldn’t tell you or anybody else!

So What Do You Do Now?
Carry on as if it’s just another day. Continue contributing to your 401k plan. Continue dollar cost averaging shares of an index mutual fund within your Roth IRA. Continue practicing intelligent spending habits.

There is no reason to lose your head and begin taking unnecessary risk when you’ve already developed a plan to succeed. Be patient, and be smart.