Living Rich & Loving It: Your guide to a rich, happy, healthy, simple and balanced life by DidoSphere

Author:DidoSphere
Language: eng
Format: azw3
Publisher: DidoSphere
Published: 2016-06-05T04:00:00+00:00

5. Pinpointing the official start of a recession

I can succinctly tell you that I have never lost money in the stock market. At the time of writing, the total of my 401k account is all 100% invested in equities. The reason is I know the behavior of the stock market----it goes up, it goes down. Historically, in a period of expansion there is a correction of 10% or more every 6 to 12 months. There is a correction of 20% or more every 12 to 18 months. I only check my account when the market is up. I am in for the long term and don’t need my money now so why will I stress myself out checking my balance after the Dow goes down 500 points? I know my balance went down. Will it make me feel better to know by how much? Will I turn my paper loss into a real loss? Of course not! What I look out for are signs of a recession because the stock market can turn from boom to bust in just a few weeks during the bear market that follows a recession. Stocks may plunge as much as 60% from their recent highs by the time the bear market bottom is reached. For the benefit of the reader who is not sure of the meaning of a recession, a recession is part of a normal business cycle. The economy expands and contracts (shrinks). A recession is a period of contraction. There will be periods of contraction caused by many different factors. But the simplest explanation is, the consumer stops consuming for a brief period of time, as in “recess” in school, i.e. a brief break between the usual activities. The most common financial definition of a recession is two consecutive quarters of negative growth. The NBER (National Bureau of Economic Research) indicates in its website that this is not the official definition and that only its panel of experts can declare an “official recession” after taking into account a number of monthly factors such as employment, personal income, industrial production as well as quarterly GDP growth. This means that we could be a year into a recession before this panel of experts declares it official. This is exactly what happened during the “great recession” of 2007-2009. By historical accounts, the recession started in December 2007 and the NBER did not call the recession until December 1, 2008. That day the Dow closed at 8,149, 42.5% lower than its most recent peak of 14,164 in October 2007. Then it took the NBER’s experts another year before they figured out that the recession ended in June 2009. I like using the DJIA as a barometer of market trend because it is an index of 30 large public companies in diversified industries making it a broader representation of how the U.S. economy and markets are currently trending. In general I use the DJIA, S&P 500 and NASDAQ as the major indices to gauge overall U.S. market performance.

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