On Second Thought

A few weeks ago on this blog I wrote about a quick turnaround in the stock market once the recovery is underway, whenever that might be.

The more I hear from the experts and experience first hand I don't think there will be a quick recovery. This morning the led economic story is that the US economy shrunk 6.2% in the 4th quarter. The worst showing since 1982.

With over 2/3rd of the economy dependent on consumer spending the future does not look very bright. We are in a vicious cycle. How can the consumer prop up the economy when they are losing their jobs, their housing equity has disappeared, they cannot get credit and their retirement portfolios have disappeared. At the same time people were not saving in any tangible manner so there were no reserves to rely on when the financial crisis appeared. Maybe we will learn that consumption should not led the economy, this is a topic for another time.

I think all these adverse factors will slow the market's recovery at a more steady pace anywhere from 7 to 9% annually once the economy stabilizes possibly later this year. This just means it would mean many years before the markets get back to where they were at their peak. I don't think there will be a quick rebound with a 20 -30% increase. Please checkout this article in The Wall Street Journal by Jason Zweig on Feb. 25th. It is about a slow recovery and the risk of investing in stocks.

Another factor is reverting to the mean long term returns. The markets witnessed incredible increases in the 80s and 90s that put the returns above long term sustainable trend lines. This severe recession and resulting sell off in the markets have brought the markets back in line near historical returns.

If we are in for lower return expectations with no quick recovery to the market peaks what does this mean for those nearing retirement that have seen their portfolios decrease by 20 to 40%? I think expectations will need to be adjusted. This will not be easy. If one wants to retire in the next couple years don't expect your portfolio to have returned to where it was pre-recession. Either your retirement income will be lower if retire soon or you postpone retirement for a number of year. I think the latter is the better choice if you have the option. Don't retire, this is assuming you have not already been laid off.