What do all these Wall Street words mean anyway?
- Alan Lavine and Gail Liberman
Unless your head is buried in the sand, it may look scary for our economy and our economic future.
How bad is it?
A recession, the word on everybody's lips these days, occurs when we have two consecutive quarters--six months--of negative economic growth as measured by Gross Domestic Product. Gross Domestic Product is the output of goods and services produced by labor and property located in the United States.
At the end of December, the U.S. Bureau of Economic Analysis had reported real gross domestic product increased at an annual rate of 4.9 percent in the third quarter in 2007. That was up from 3.8 percent in the second quarter. But newer figures, expected before this is published, could paint a different picture.
There has been lots of talk about how the Fed has acted to avert a stock market "crash." The consensus is a crash occurs when the market declines at least a 20 percent--as measured by the S&P 500 index. Do you remember "Black Monday," on Oct. 19, 1987--that dismal day in which the Dow Jones Industrial Average dropped by 508 points--more than 22 percent? As of this writing, we had not experienced a recent market "crash." Whew!
A "bear market" happens when prices of securities spiral downward and everybody is depressed, fueling the downward movement further. The consensus generally is that a downturn of 15 percent to 20 percent in multiple indexes can lead into a bear market. Our last bear market occurred 2000 to 2002, fueled by the tech stock boom.
A "correction" is a reverse movement--usually negative, of at least 10 percent. Corrections are considered temporary price declines that interrupt a generally rising market.
A "bull market" is when securities are rising in value or are expected to rise. Since World War II, except for some brief periods, we have been in a bull market. But markets run in cycles. Bear markets typically follow bull markets. So hold onto your seats!
Don't be swayed by these scary terms. The fact is we may not even know we are in a recession until after it's over!
It's more important to understand that anytime you invest, you are subject to market ups and downs. Lately, those swings have become more volatile. So know, based on the nature of your investments, how great the market swings are apt to be.
For example, often, U.S. Treasury bonds rise in value during a recession because they are considered among the safest investments.
By contrast, a study by Standard & Poor's, New York, reveals that stocks, during the last 11 recessions, dropped an average of 26 percent.
Just in case, it could pay to consult with a financial advisor on how to manage your money in a recession and bear market. Much depends on your current positions, and the amount of risk you can handle.
By investing in some shorter-term bonds and debt obligations, you can help cushion your stock losses. Plus you'll free up money to invest when stock prices are low.
If you're jittery, take profits in stocks or stock mutual funds and offset them with losses on others. After 31 days, you can buy back the same stocks or stock funds--perhaps at a lower-price--and still get the tax write-offs.
Buy stocks or stock funds at bargain prices. Just make certain you buy financially strong companies with the prospect for attractive longer-term earnings.
Above all: Make sure you are well diversified, and have plenty of cash on hand to meet immediate needs.
Spouses Gail Liberman and Alan Lavine are syndicated columnists. You can purchase Alan Lavine & Gail Liberman's latest book Quick Steps to Financial Stability (QUE Publishing 2006) online at www.moneycouple.com or at your local bookstore. E-mail them at MWliblav@aol.com.
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