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Blue Summit Financial Responds To Fear Of Possible Recession

By Shane G. Yonston & Judith L. Seid

January 18, 2008

Blue Summit Wealth Management, a national leader in Socially Responsible and Sustainable Financial Services, sent a letter to clients in response to a rising number of concerned clients calling to discuss the possibility of a recession and to get advice about what to do.

In the letter, Blue Summit Wealth Management stressed the importance of maintaining a level head and an objective view for reaching financial goals and managing investment portfolios.

To put things into perspective, a graph of the Dow Jones Average for the last 2 year period was included:

So, what's causing all the hype?

The catalyst has been the fallout in the sub-prime lending market. Big banks and financial institutions are laying off employees, posting big earnings losses, and having lots of defaults. Tied to the lending issue, housing prices have fallen, construction is down to the lowest in 16 years, and building permits have dropped.

Today all the talk is about recession, as if a recession were easy to predict and "obvious," not to mention the fact by the time a recession is called a recession, it is likely close to ending. All the scary doings in the financial sector and long-term imbalances in the domestic economy don't argue away that the hard economic numbers so far display a slowdown in growth and no more. Most recently, industrial production has been firm and real interest rates are about 1.5%, a level not associated with developing recession. Consumer sentiment is down, but consumer sentiment has not shown to be very well correlated with actual consumer future behavior, and discretionary purchases are actually a very small percentage of consumer spending. In addition, unemployment figures have been high although the number of U.S. workers filing new claims for unemployment benefits last week unexpectedly fell to its lowest level in nearly four months, an encouraging sign amid growing concerns that the economy is falling into a recession.

To keep perspective on all of this, two years ago the markets fluttered at the idea of a bird flue pandemic and remember the scare of Y2K?

Conditions in the 1990-91 period were uncannily similar to those of today, and actually ended up forming the start of one of the great periods of economic prosperity and equity bull markets. Now, one may argue that technology and the Internet arose to save the day. And one may ask what will arise to save the day this time? It might be breakthroughs in renewable energy, or medical science, or peace on earth. One doesn't know.

As the residential real estate market implodes and overall growth slows, the need or demand for loans declines. The whole marketplace of useless financial activity results in economic conversion to products and services of the future.

Furthermore, history tends to suggest that a recession doesn’t necessarily mean poor market performance. To illustrate this point, below you will find a series of graphs showing how the S&P 500 performed during the recessions over the last five decades.

According to the National Bureau of Economic Research, there have been seven recessionary periods in the last 5 decades. The dates on the graphs show the start of the economic down-turn, the "peak," to the end of the declining phase, known as the "trough," when our economy begins the rising phase of the business cycle. Recessions since World War II have lasted less than 9 months on average.

To the right of the graph, we've indicated whether the market was up (?) or down (?) by the end of the recession, the point at which the economy began to pick up again. There have been 4 up periods and 3 down periods with an average stock market downturn during recession of only -2.53%.

In light of the fact that there is sometimes a tendency for investors to become overly concerned and cautious, Blue Summit Wealth Management suggests that a commitment to a sound long-term investment strategy is almost always the best course of action.

The opinions expressed are not intended as specific investment advice or to predict future performance.