If prices AND unemployment are both rising, what might this mean for the economy?
We're beginning to see this phenomenon now - will we continue to see it, if so what will happen? What can an investor do to profit?
Best Answer
508 points
John answered 11 months ago …
Rising unemployment has been one of the most bearish signs we have seen yet. Why?
1. Well the falling dollar is connected with interest rates, and rising gold connected to the falling dollar. Although we might not like the falling dollar or rising gold, we do like lower rates and none of this is really effecting or economy or a reflection of our situation.
2. Inflation, as prices begin to rise on staples such as corn or milk we can combat the fed is their to combat inflation if it rises to fast.
3. Yet with Unemployment, we are talking about less people working, less money in the system, less money to pay for rising prices, less job creation, less domestic consumption, less retail sales, less consumer goods, sales. This list goes on and on.
Although many people believe the unemployment number is flawed and it may be, but it is the same flawed number for many years, so the number from the 70's is relevant to 2008. The flawed number can show increasing or decreasing on a previously flawed number if you follow my logic.
Rising unemployment and prices indicates a slowdown in the US. With less people working and higher prices, less consumers. So retail will probably continue to slide even as the sector is already undervalued. The second half of 2008 will probably be very good for financial.
Our economy as a whole should rebound. It seems to me we have been in a bear market for sometime now and maybe bottoming out. We had some positive economic data come out the other day sending the market into a rally. We need to pay close attention over the next couple weeks and months and see how the data is perceived. If we continue to see increasing signs of a slow economy I would invest accordingly. If the data begins to show signs of a economic pick-up then watch for a bull run.
Bush and the Fed released a $150 billion dollars stimulus package in order to spur the economy, lets see how that goes but it does seem pretty well engineered.
The market is in a time of uncertainty. I would keep some cash on the side and wait for the opportunities the market is presenting.
Answers
1130 points
sundarkambam answered 11 months ago …
We will see the following :
Weak consumer demand, high labor and fuel costs, and credit market turmoil
through decreased availability of credit.
Employees have increased hardship withdrawals from their 401(k) accounts, in many cases to make mortgage payments or ward off personal bankruptcy.
Year-end bonuses will fall by 10 percent relative to last year.
Depreciated dollar will also mean changing the location of investments and outsourced employment.and also less Capital spending by the companies.
extracts taken from the link : http://www.financialsense.com/Market/daily/wednesday.htm
3127 points
EthanR answered 11 months ago …
Since rising prices and unemployment will undoubtedly create a bear market in stocks, the best thing is to create a stock portfolio which consists of defensive stocks, such as food and consumer staples (PG, JNJ, MO, PEP), some shorting ETF's (QID, DOG), and some gold (GG, GLD). However, there is another sector that I am thinking about, and that is the payday loan stocks, such as AEA. They are pretty beaten down lately, but when someone is in a bad situation, they might be more inclined to use those services.
I took this quote from a site on technical analysis: http://www.shieldsandco.com/market_analysis.html
"In the 1970's when inflation ruled, it was mining and energy stocks that performed well. Indeed, Coca-Cola sold for 40x earnings in 1972 and only 9x earnings in 1981. Had you bought Coca-Cola at the end of 1972 - a real "buy and hold" stock - you would not have broken even until 1985!"
Another site said that value stocks were the best play during the 1970's. Since I was still a school lad then, I will leave it to the more, er, senior members of our community to inform us about what stocks performed well during that time.
236 points
Steph answered 11 months ago …
This is the scenario where fortunes are made off the backs of the unfortunate.
People who are maxed out in their credit and are living from paycheck to paycheck will be in increasingly more serious trouble. Those who have a little put away will most likely have to spend their nest eggs to keep a roof over their heads. The general public will spend less on discretionary items and that will cause small businesses that have high debt ratios to close and others to lay off workers. Big businesses will follow with massive layoffs. A very depressing outlook.
This scenario will offer the biggest profit potential for those that have cash. Distress sales will set up many opportunities in every sector. Maybe you can buy a classic car at a fraction of its value or stock in a great company at a severely discounted price.
2703 points
MNSL answered 11 months ago …
In an inflationary situation like this we can see weak economy and weak stock market. Domestic income will come down as a result of less employment. People will spend less. Some people even will not have enough income to spend for their day to day needs. There will be some defaults in mortgage payments if some employees loose their jobs. There will be less demand for some products and services such as electronics, traveling and other luxury items.
Therefore some industry especially non- consumer industries, some retailers will have less demand and their earnings will come down. So I think intelligent investors will avoid investing stocks which are affected by rising prices and unemployment. In this type of situation, investors will go for bargain counters with promising future earnings. Some will go for defensive stocks. Those who have long term view will adapt different approach in picking stocks. Successes of investing stock market during inflationary period depend on what type of investment strategy adapted by the investors.
However today we are in a different situation. With this price rises still stocks markets thought out the world are holding except this January slow down. Still there are opportunities in some sectors. We are in final stage of bull market.
As John mentioned I also see final quarter of 2008 will probably be very good for financials. Some consumer stocks also will benefit.
2547 points
Oldman answered 11 months ago …
Ethan R.'s comment about 'senior' Tickerhound members is reasonable.
In the initial recessionary stages (assume we're in one now ...for the sake of an illustration), the "Sin & Vice" stocks did well in the 30's and 70's when the recessions were of significant duration: Beer, Cigarettes and Gaming. Later in the recessionary period, Utlities and Consumer Staples did very well. In those days, the healthcare was the family doc, and Pfizer was still a citric acid producer out of Bushwick in Brooklyn ...well, it was a bit bigger, but not a "Modren" Pharma Co. What you're looking for is securities of companies that produce the essentials, have little debt and a reasonable return on sales.
It is a big mistake to buy bonds (except certain large, well-researched , closed ended funds, such as WIA) at this time, because the prices will rise as interest rates fall, then the prices will fall as the interest rates rise to compensate for deficit increases (inflation demand on capital markets... when the Treasury can't find buyers for a weaker and weaker dollar).
This wasn't so much a problem in the 70's, but in the earlier recessions at the beginning of the 20th Century (1904-08), 1916 and 1923, this is what happened in the U.S., then during WWI in Britain, and finally, in the Weimar Republic of Germany, when people carted marks in wheelbarrows to the market for staples. In the early 30's, bonds also rose and the fell, as the Federal Gov't printed more money, and then took the U.S. off the gold standard ... and gold coins could not be used for currency here.
One good, long-term investment as the recession is at its deepest, is dividend-paying timber stocks: Plum Creek, (PCL), Rayonier (RYN) St Joe (JOE), are some of the larger ones, Delta Gas is another one that's been beaten down, recently, in share price. But as commodity prices begin to stabilize at lower levels after a recession, building and land development for homes and construction requiring wood products... really takes off. Meanwhile, you get paid to hold the company's risk.
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