Pundits ponder

The debate over whether or not the U.S. economy is in a recession appears to be moot. A 40 percent decline in the value of the stock market over the last 12 months and a hefty 18 percent drop in the first week of October appear to have settled that issue for pundits and individual investors alike. Semantics aside, discussion now centers on when we might expect the markets to bottom out and when we’ll see a rebound begin. There is no simple answer and –of course— no consensus on when we might expect stocks to rally. It is important to remember that a day or two of activity (positive or not) doesn’t constitute a trend. Whatever their position, experts do agree that dumping your stock is a bad move when prices are at a three-year low. Abandoning the stock market now means that an individual investor will have a tough time making it back into the market in time to reap the benefits of a future recovery.

Here’s what some the nation’s market experts are saying:

• Some believe that the recession will be mild— ending perhaps in spring 2009. These pros believe the problem is financial, not economic, and cite the job market as the strongest recessionary job market we’ve seen in the last four decades. They believe the worst of the crisis is contained within the finance and housing sectors and that the rest remains reasonably sound. The Treasury is now able –thanks to the bail-out or Troubled Asset Relief Program (TARP)—to purchase distressed assets from troubled banks and many hope that will stimulate the economy. Lower oil prices plus a falling trade deficit should also help.

• Pundits note that a possible rebound in spring doesn’t mean that the markets will continue to suffer until then. Conventional wisdom suggests that stocks rally in anticipation of a rebound—about 2 or 3 months before a recession ends. Many economists believe that the recession “officially began” in the U.S. in July.

• Other commentators do see jobless claims as a problem. As the claims approach the psychological barrier of 500,000, they fear that this will further erode consumer confidence, which is already at its lowest level in 30 years. They don’t think that the financial crisis is completely over, or that the Treasury and Federal Reserve have yet “unlocked” frozen credit markets, as banks continue to tighten their lending requirements at an unprecedented pace. If future home buyers aren’t able to access funding, the effect will reverberate throughout the economy, deflating consumer confidence even more. These experts warn that a rebound is not on the horizon, yet.

Tax Implications

The eventual bill for rescuing Wall Street has yet to be tallied. In addition to the $700 billion bail-out of mortgage-backed debt, the government has extended $365 billion for loan guarantees and other costs. With the real possibility of federal deficits reaching a staggering $900 billion in 2009, it may be difficult for a future President (regardless of who is elected to office) to keep tax-cut pledges.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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