There always seems to be some sort of distraction for investors to deal with. The distraction may be either fear inducing or greed inducing, depending on its form, but both usually cause investors to make mistakes when viewed with the benefit of hindsight. At present, we have a lot of fear-inducing factors to digest, so many, in fact, that they seem to be covering up a few kernels of good news.
• Economic contagion from European debt crisis
• Failures of U.S. government to move toward fiscal solution
• Upcoming presidential election
To boil it down to the main concern for investors – will any of the above cause us to experience a new recession which would potentially impact the stock and bond markets in which we invest? Of course, no one knows for sure how the future will unfold, but it seems hard to be optimistic at present.
It's human nature to ignore good news when we're feeling lousy about our prospects and to ignore bad news when we're feeling good about ourselves. These situations create a perilous environment in which to make decisions about our financial and investment plans.
Is a new recession a possibility? Yes, of course, a recession is a possibility. But as I have written about in past articles, making decision based on what is possible, may not be as wise as making decisions based on what is probable. So while acknowledging that my guess at what happens next isn't worth any more than anyone else's, perhaps we shouldn't be making decisions based on guesswork at all.
While historical precedent and indicators are also by no means perfect, they do at least give us some basis for forming a view of a probable outcome. One indicator which has been reasonably reliable at forecasting the direction of the economy is the Leading Economic Indicators Index, which is developed by the Conference Board, a group of economists that studies the historical trends which unfolded in the past as the economy expands and contracts.
The Leading Economic Indicators Index is a composite of many indicators which have tended to move up or down in advance of past expansions and recessions. The implication is that it may give some advance warning of the direction of economic activity. In the last 50 years, there has not been a recession which started without the Leading Indicators Index exhibiting a year-over-year decline. In other words, a lower reading from the Index than the level it was 12 months before.
At present, the Leading Economic Indicator Index is not only showing positive growth over the last 12 months, it is actually accelerating a bit in its advance in recent months. So, that doesn't mean we can't a recession, but it means it is not the likely or probable outcome, at least with the information we have in hand today. Remaining vigilant and monitoring for changes in trends is always important. For example the Leading Indicators for France and Germany have started to trend down. They are not in danger territory yet, but bear some watching. As always, I urge you to use a well-defined plan to direct your investments without emotion.
Tom Breiter is president of Breiter Capital Management, Inc., an Anna Maria based investment advisor. He can be reached at 778-1900. Some of the investment concepts highlighted in this column may carry the risk of loss of principal, and investors should determine appropriateness for their personal situation before investing. Visit www.breitercapital.com.