The credit crisis is evolving. And in my opinion it is evolving into its riskiest phase since it began. There is a large contingent of investors who are convinced that the recent 3.3% GDP, benign ISM figures, positive factory orders and slow-down in the rate of house price declines are signs of an impending recovery in the economy and the stock market. I could not agree less at this juncture.
In my opinion, the credit crisis has morphed into an entirely different animal with tentacles outreaching into parts of the economy that were previously untouchable. The housing market continues to deteriorate, global recession is a near certainty now, credit spreads continue to widen and employment figures continue to weaken. Although the damage in the housing market does not appear to be accelerating it is certainly as bad as it was at the beginning of the year. Combine this with a slowing global economy and we are staring at an upcoming earnings season that will display weakness in financial companies as well as the previously strong tech and industrial sectors. To make matters worse, the deflationary spiral we’ve spoken of for many months has come to fruition and is reducing the once high prices that kept margins robust for so many commodity based corporations. Don’t expect stock prices to benefit from the seasonally strong 4th quarter….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.