Now that most countries have stated they are coming out of the recession, we’ll now have to see if the economy will truly improve from here or if it’s only a technical end due to one positive quarter.
There is quite a bit of research that suggests recessions happen in a “W” or “double dip” pattern. By that I mean, the bubble bursts and there is an initial correction in the market. The market then begins to improve as government, media and investors feel we have returned to normal. Unfortunately, this is accomplished through government policy that increases debt, often only to move future sales and growth up to the present. Another issue is the ease in which companies can temporarily improve their bottom line growth through reductions in salaries and other expenses. However, they cannot continue this trend without an actual increase in their sales growth.
So as government debt and corporate financial statements provide a sense of recovery, eventually the government will have to decide to increase taxes or let bond yields increase which therefore increases the cost of borrowing. Around the same time, companies will run out of options to increase earnings as their sales remain flat. All this then begins to unravel, leading to the second major drop in the market.
This drop is historically a much deeper correction since most resources have been exhausted and investors become fearful as everyone tries to unload their portfolios at lower and lower prices.
Since the stock market can be unpredictable, it’s possible that this won’t be the case this time around. Most would agree that we could be flat for some time, if not at least a slight correction. Since we can’t predict the future, it’s always helpful to improve your personal finances as a form of recession proofing. Then, no matter which way the economy and stock markets head, you’ll be prepared.