Investing During A Recession
Jim Graham

Should the Economy Drive Your Investment Strategy?

The past few months we have seen problems in the financial sector, the stock market dropping, and a lot of talk about the economy slowing. There is a good chance we are moving into recession, or indeed may already be in one. Many investors adjust their investments based on their expectations, whether it is market timing or switching to the hottest funds. After taking a brief look at current economic conditions, we will look at what happens to investments when you try to time the market based what is happening in the economy, investing in industry sectors based on the business cycle, and what this means for investors now.

Current Economic Conditions

The economy has been troubled since the bursting of the housing bubble. With home values falling, and the prices of food and energy rising, consumers have less to spend. Lenient lending standards combined with creative mortgage and financing techniques mean that many of the mortgages issued in the past few years have begun going bad.

The drop in value of mortgage securities has led to banks posting huge losses. Bear Stearns needed to be rescued and the rest are busy raising new capital to shore up their balance sheets. As they conserve cash, the banks have less to lend to consumers and businesses. This leads to a fall in real economic activity and a possible recession.

The Federal Reserve has been busy trying to prevent that from happening. There main tools have been to cut interest rates, pump cash into the economy, and expand lending to banks and investment banks in an effort to relieve the credit crunch. But with the dollar falling and inflation rising, this is the opposite of what they normally should do.

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