My post is divided into two parts. In the first part, I post my views on market timing and a couple comments on speculation vs investments.
In the second part, I post my views on the recession queries of Sid_Earth.
====================
I invest and I also speculate.
In general, I do not advice others to speculate unless they show an interest and want to. In that case, after assessing their risk appetite and affordability based on their assets and goals, I suggest a small portion of their portfolio with which they can speculate if they want after explaining the issues with market timing.
Market timing has been succesfully done by very very few, although technical traders will contest my statement. None the less such trading is succumbed to even by those who understand this, perhaps due to adrenline rush, perhaps due to misplaced confidence or perhaps out of boredom of staid investing.
If I can determine that recession has already started then others in the field probably can also and if they can then that is already priced in the market. This concept makes sense for the long term. However, in the short term, even if priced in, speculators will cause swings by reacting without consideration to news being priced in. This causes markets to over react in both directions and speculators, arbitrageurs and very very very savvy market timers have to succesfully time this in both directions (sell and buy times) to get somewhere.
There have been a number of studies done and I am sure technical traders and others might find some flaws with these studies, but here is one brochure that one should read because what it says is true.
http://www6.ingretirementplans.com/SponsorExtranet/MarketTiming.pdf The Penalty for Missing the Market
Trying to time the market can be an inexact and costly excercise.
* This chart illustrates a return on a lump sum investment of $10,000 invested in the S&P 500 Index from January 1, 1979 to December 31, 2008.
Period of Investment_________ Average Annual Total Return_________ Growth of $10,000
Fully invested______________________ 11.00%__________________ $228,922.97
Missing the 5 best months______________ 9.07%__________________ $135,256.89
Missing the 10 best months_____________ 7.50%__________________ $87,549.55
Missing the 15 best months_____________ 6.18%__________________ $60,434.04
Missing the 20 best months_____________ 4.91%__________________ $42,121.77
* Sources: GE Asset Management
========================
Now, understanding the above, the speculation sought is if we already are in a recession and should we alter our investments.
If one is altering investments based on speculation, it is speculation. I agree that we can chalk this to semantics but it does need to be underlined that speculation is different than investing.
As to Sid_Earth's query:
Now as to whether we are already in a recession - possible, but from a technical perspective, I seriously doubt it. If the GDP growth numbers for this quarter are positive (anticipated to be 2.3%), then technically we are not in a recession.
How about recession starting in the third quarter? I personally doubt it. I think that the numbers of jobless claims, new jobs created, GDP growth rate, all, while pointing to an anemic recovery do not suggest a double dip. Of course we won't know till January 2012 if we technically entered recession in 3Q2011.
Why do I doubt that recession will not start in 3Q? This is because, the amount of money pumped in has been large and the effects of this liquidity is generally delayed and we have not seen all the effects yet and the effect is going to be growth. I think companies have already slimmed enough and cannot afford to slim further. I don't think they need to as they are sitting on fair amount of cash. I see no reasons that would drive growth down unless there are massive failures. I see preparations for the campaigning for presidential elections and general govt policies will create an economic environment of growth.
Many argue that GDP growth rate while a technical definition of recession is not really reflective of recession. For example, a 9.1% unemployment rate means we are in a recession and a depression regardless of GDP growing. Others argue that GDP growth rate is nor a proper measure for technically defining recession.
Whatever may be the case and putting technical definitions aside, there is no question that the recovery is anemic. But I think we will chug forward not backward which is what technically a recession is.
