The dreaded "W" (news & commentary by Gordon Pape)
So are we or are we not going to experience a double-dip recession referred
to as a "W" in economists' shorthand?
I don't know. Neither does Federal Reserve Board Chairman Ben Bernanke,
although he and his fellow governors are worried about the possibility. The
statement accompanying the Aug. 10 decision by the Federal Open Market
Committee (FOMC) to hold the line on interest rates was a classic example of
"on the one hand, on the other hand".
Here's what I mean:
On the one hand: "Household spending is increasing gradually."
On the other hand: "(It) remains constrained by high unemployment, modest
income growth, lower housing wealth, and tight credit."
On the one hand: "Business spending on equipment and software is rising."
On the other hand: "Investment in non-residential structures continues to be
weak and employers remain reluctant to add to payrolls."
The Fed acknowledged that the pace of economic recovery has slowed in recent
months with housing starts at a "depressed level" while bank lending "continued
to contract".
But despite this, the FMOC reached a positive, albeit woolly, conclusion: "The
Committee anticipates a gradual return to higher levels of resource utilization in
a context of price stability, although the pace of economic recovery is likely to
be more modest in the near term than had been anticipated."
In the meantime, interest rates will remain at historic lows for "an extended
period" and the Fed will support U.S. government bonds by continuing to invest
in longer-term Treasuries as current holdings mature.
Not that U.S. Treasuries need a lot of help รข€“ as they do every time W-fever
raises its head, investors were selling stocks and piling into bonds at a frenzied
pace for most of last week. At the close of trading on Aug. 5, U.S. Treasury
bonds with a 10-year maturity were yielding 2.9 per cent.
One week later, on Aug. 12, the yield had dropped 15 basis points to 2.75 per cent as investors fled from the stock markets. In this country, the yield on 10-year Government of
Canada bonds fell 10 basis points in the same period to 3.01 per cent.
Of course, this isn't the first time this has happened. We're going through a
period of extreme volatility in both stock and bond markets as investors react
emotionally to the news of the day. And we're likely to see more of the same
until such time as fog bank obscuring the economic future begins to lift.
To make matters worse, we're in August, a notoriously slow month in the markets. As one
broker put it: "It's like trying to sail a boat with no wind. You haven't a clue
where you're going."
Personally, I don't believe a double-dip recession is likely, although we can't
discount the possibility entirely. We weren't going to emerge from the worst
financial meltdown since the Great Depression overnight and anyone who
thought otherwise was dreaming.
But we will come out of it eventually and in the meantime, if you are feeling brave you can take advantage of some of the great bargains that are out there.
In the end, how you respond to this situation depends on what type of person
you are. It would be great if someone could tell you with absolute certainty what
will happen over the next year or two. But no one can. There are many possible
scenarios, including a continued gradual recovery, a double-dip recession, a
Japanese-style stagflation, or a genuine depression.
Conservative investors should play it safe. Weight your portfolio towards highquality
fixed-income securities and focus your stock list on Canadian banks,
utilities, and leading telecoms such as BCE Inc., which just raised its dividend by
5 per cent.
More aggressive readers should look for opportunities with unusually strong
profit potential such as energy and mining stocks. But even if you are willing to
accept a higher degree of risk, cushion your downside by including some quality
bonds or bond funds in the mix.
It is easier to invest during periods of economic stability. But to succeed over
the long term, you must have the ability to ride out the bad stretches with
minimal or no damage to your finances. The starting point is to understand what
type of investor you are and then structure your portfolio accordingly.
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