Rational Advisor

While recessions seem to rear its head again there is another certainty about recent business cycles and recessions: recessions have been short lived (seven months on average) and inevitably lead to another upturn in the markets. In Canada, for example, the S&P/TSX Composite rallied after recession in the eighties and nineties.

The final years of a cycle are predictable in another way: markets are often roiled by a financial crisis, such as the Asian currency crisis in 1997-1998, the 1998 Implosion of Long Term Capital Management hedge fund or the current sub-prime debacle. To restore stability, the Federal Reserve intervenes and the markets rebound but remain volatile. The last two longest expansions were in the 1980s and 1990s. And just like it was then, when you get about two-thirds of the way through the 10-year business cycle, you get some kind of crisis and central banks ease monetary policy. That juices the economy again and you get that late third of economic growth.

To steer through this volatility, investors should include bonds as part of their diversification. A slowing economy or soft landing has historically proven healthy for corporate bonds.

What effect will the US elections run up have on markets? If history repeats, the markets could move up through to November 2008 presidential election. During this period, the Dow has always advanced – these are large caps and dividend oriented companies.

Rational - true story, for those that know Amy - The stoplight on the corner buzzes when it’s safe to cross the street. I was crossing with Amy a coworker of mine. She
asked if I knew what the buzzer was for. I explained that it signals
blind people when the light is red. Appalled, she responded, “What on
earth are blind people doing driving?!”

Comments RSS