The election is over and our country moves forward with president-elect Barack Obama, who has his work cut out for him. Unemployment numbers are up and retail sales are down sharply; proof enough that we are staring into the teeth of a fairly severe recession.
These past four days have produced a lot of talk about the need for an increased stimulus package to our economy beyond the $700 billion already earmarked by Congress to shore up financial institutions.
With all the uncertainty regarding the magnitude of the financial crisis and its impact on domestic and international economies, it seems to me that the big question is whether we are on the verge of a global financial meltdown or whether we are confronting a fairly severe recession – one that we eventually will dig ourselves out of. I am betting on the latter based on two observations.
First, despite the financial quagmire we are in, the industriousness and productivity of human beings around the world will win out in the end. The financial markets will eventually reflect this in the form of improved flow of capital and lending, and the valuation of common stocks that will benefit from a recovering economy.
Second, there seems to be a concerted effort by governments around the world to address the severity of the current financial crisis and economic slowdown. But providing an economic stimulus package is the easy part. The big question is whether or not the new administration will confront the longer-term issue of fiscal responsibility in terms of government spending.
The stock market, as reflected by the S&P 500 index is off 35 percent for the year, and in light of this decline, much has been written about the market’s current valuations. By many estimates, the stock market is as cheap as it has been in the last 20 years.
For that reason, I am as optimistic as I have been for quite some time about the market’s potential for generating returns in the coming decade.
That’s not to say that the stock market can’t, or won’t, trade at significantly lower levels in the next 24 months as it continues to price in a slowing economy. For that reason, it is extremely important that you take the time now to revisit your long-term financial plan for possible adjustments to your asset allocation percentages.
This is especially important for investors who are within five years of retirement, or are retired. It doesn’t make sense for you to take on unnecessary risk in any investing climate, much less this one. At the same time, if you stay committed to the percentages and dollars you do have allocated to the stock market, over the next five years and beyond this allocation is almost certain to accentuate your fixed income investments, and likely have a positive impact on your financial well-being over your investing time horizon.