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Are we facing an economic headwind or a tailwind. a correction or a recovery? That’s the question on many experts’ lips right now.
If you turn on almost any business channel or program at the moment you will invariably find a debate between those who believe the stock markets have turned a corner to recovery and those who think they haven’t.
There can be no doubt that the markets are performing better. The S&P 500, for example, has been on a winning streak of late. It has been on the rise for 11 out of the past 13 weeks.
In addition, at the end of last week all of the major Wall Street indexes booked their third straight weekly gains. The Dow Jones Industrial Average rose 3.1 percent while the S&P 500 gained 2.3 percent and the Nasdaq climbed 4.2 percent.
But while the markets are up about 40% from their 12 year lows in March there is still a lot of uncertainty around. Even Federal Reserve Chairman Ben Bernanke said last week that the recovery would be slow. He said ‘that data shows the economic contraction may be slowing, but unemployment will continue to rise for some time’.
He also said that he still anticipates that the economy will start its recovery later this year, but cautioned that “we will have a weak labor market for some time.”
On Friday the latest – and much anticipated – jobs data showed that while unemployment had reached a 26 year high of 9.4% in the United States, the pace of job losses had actually slowed. While the markets expected 520,000 job losses in May economic data indicated that only 345,000 jobs were lost. This was taken as a sign that the US economy at least was improving.
However, despite the positive news on jobs other concerns are also emerging. For example the price of oil is rising. Last week oil ended at USD $68.44 a barrel – having come down from its week’s highs of USD $70.
And while increased oil prices could signal the emergence of a stronger economy such increases could also mean rising inflation. There was speculation last week that the Federal Reserve could increase interest rates if there were signs that the United States economy was recovering.
While Bernanke’s comments about recovery later this year and last week’s improved economic data are worth knowing to gauge the general direction of the markets we should continue to exercise some caution. As always it is dangerous to take a short-term view of the market because this would be tantamount to trying to ‘time the market’ – which is always a risky practice.
Those have been sitting on the sidelines watching and waiting for the right time to invest a lump sum might want to enter the markets now. However, they must be prepared to take a long term view.
An alternative approach would be to begin ‘drip-feeding’ investments in to the market by buying stocks or funds on a monthly basis. Investing in such a manner brings with it the two-fold benefit of buying stocks and funds at reasonably low prices while guarding against any further corrections.
By taking this ‘drip-feed’ approach investors will not miss out on a recovery play but will also not be caught out in the event of any further downturns. But much like the lump-sum investor, the monthly investor must also take a long term view.
That way you can sit back and watch as the recovery debate continues.
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