Recessions are not supposed to happen when central banks are trying to pump up the economy, as has been the case for over two years now. They usually happen only after central banks raise interest rates to tame an overheated economy.
So it was a bit of a shocker to hear Economic Cycle Research Institute (ECRI) publicly declare on Sept. 30 that its leading indicators are signaling the U.S. economy is going to enter a recession and it’s too late for policymakers to avert it. Given ECRI’s rather reliable forecasting record, we are very likely going to see employment, corporate revenues and other economic series deteriorate in the months ahead.
The next few months will thus likely see the kind of news flow that could sink stock markets. Many buy-and-hold investors may find their resolve tested; some may throw in the towel, or at the least cut back to some degree on their equity exposure (when investment plans usually call for rebalancing toward equities).
Then again, we seem quite close to the point when policymakers will finally respond with sufficient vigor and unity. According to CIBC World Markets strategist, Peter Gibson, what is needed (and what we’ll likely get) is “a U.S. infrastructure plan, QE3 in some form, a massive European response [to the eurozone crisis], and easing from China in a coordinated fashion over the next two months.”
As Gibson notes in his Sept 23, 2011 research report, we’ll see such an enormous policy response because “if authorities fail to act in a decisive, globally coordinated way, investors will likely experience the kind of crisis that the world has only faced a few times in 300 years.” In other worlds, government officials will act because they must. Failure to do so in sufficient degree opens the door to a downside almost too catastrophic to imagine.
Perhaps then, the suitable reaction for investors is to stay the course—don’t yield to the urge to dump stocks. Keep the long-term view in mind. Maybe even proceed—if your nerves are holding up—with adding to stock positions (as Tony and Rob Boeckh advise), despite the headlines being rife with doom, the logic of the bears seeming impeccable, and your existing equity holdings possibly sliding with the rest of the market.