So far, the flailing stock market has dominated the attention of Wall Street and Main Street alike. Yet while governments around the world start to address some of the systemic problems in the markets, uncertainty goes far beyond where stocks will trade next month or next year.
With Wall Street in crisis, more all-pervasive problems in the U.S. economy were largely forgotten. Now, though, investors are turning their attention back to fundamentals -- and for the most part, they don't like what they see.
A glass half empty
How has the economy gone wrong? Let me count the ways:
- Contraction. The nation's GDP fell at a 0.3% annual rate during the third quarter. Moreover, growth in government spending -- nearly 14% at the federal level -- offset steeper declines in consumer and private-sector business spending.
- People out of work. Unemployment in October hit 6.5%, the highest in 14 years. Initial claims for unemployment benefits are up nearly 50% from year-ago levels.
- Pessimism. Consumer confidence hit an all-time low last week.
- More job losses coming. Firms like Symantec (NASDAQ:SYMC), Electronic Arts (NASDAQ:ERTS), and American Express (NASDAQ:AXP) are among the latest to announce new layoffs.
Is it any wonder we've seen the market resume its drop in the past two days? And until people start to believe that things will in fact get better at some point, the path of least resistance for the stock market will be down.
Still, as a long-term investor, you need to look forward to brighter times. And while it's impossible to know exactly when the economy will start turning around, there are some signs you can look out for that will give you a clue as to whether things are getting better.
Waiting for a turnaround
With the general mood among investors so negative, many traders want to see a capitulation among stock investors. If it happens, it'll come from a huge spike in bad news -- one that will include such dire predictions that you'll be tempted to join in the ensuing panic. Disciplined investors will realize, however, that most of this bad news is either backward-looking or was already predicted from previous events. Once shareholders anticipate the worst, there'll be nowhere to go but up for stocks.
Next, look for signals that some markets are bottoming. I'm not just talking about stocks -- other areas, especially the housing market, commodities, and corporate and municipal bonds, could be even more important. Consequently, stocks like homebuilders Toll Brothers (NYSE:TOL) and Hovnanian (NYSE:HOV), as well as commodities plays like BP (NYSE:BP) and U.S. Steel (NYSE:X), could be the first to turn as the economy recovers -- although there's no guarantee they won't first fall significantly, even from current levels.
Last but most important, watch to see if international leaders can start cooperating instead of working at cross-purposes. Although many countries seem content to blame the U.S. for the world's troubles, it'll take a coordinated effort to fix the problems that now plague the entire world economy.
If world leaders can work competently and effectively, the confidence they generate among investors and the public at large will do most of the work of fixing what's broken. From there, it should only be a matter of cleaning up loose ends.
Don't wait
Remember, you won't necessarily see any of these positive signs before the market turns. As soon as markets even start anticipating them, you can count on stocks rallying. But if you wait for the full recovery before you start putting money to work, you can also count on missing most of that rally.
That's why continuing to invest now, even despite the fact that things could get much worse, could work out better for you than waiting. Be smart with your capital -- but when you see opportunities for huge gains, don't miss out.
For more on investing in a struggling economy, read about:
- How you can find dirt cheap values in the markets now.
- Cream-of-the-crop stocks that are ready to break out.
- What to do to salvage your retirement.
