In 2008, the markets haunted by the sub prime crisis and skyrocketing fuel prices as well as high food prices. Today in 2011, we are now faced with a problem that seems to be inevitable. We are faced with an imminent problem which is credit crisis.
The Central Bank of America or Federal Reserve tries to stimulate the economy that was believed by many to be headed for disaster. But, most of the time the result was a short term boost in the stock market that lasted only a few weeks. Now, much economist fears that we are headed for a economic slowdown.
Although recession can create many problems for our economy, it still can allow investors to make some money. Before making any investment during a recession, you have to know how the market behaves first. In general, the following things are usually observed:
i. The stock market is the first to be affected. During a recession, household income decreases, this will cause household spending to be reduced. When people spend less money to buy products, companies will suffer, and as a whole they will make less money and lower earnings. Lower company earnings will in turn reduce its stock price.
ii. Inventories will decrease. This is because the businesses will usually reduce their production level due to the low demand of the products. Lower production will then cause higher unemployment.
iii. Wages will decrease. The wage level will decrease due t it’s much more difficult to find jobs.
So, the first is you need to start putting aside a proportion of your money into a safe investment. Most of the rational investors will know that the economy will rebound in the long run and sharp declines in stock prices are just temporary. We should try to eliminate the fear feeling in this kind of situation.
Just imagine, if you are given a few thousands dollar to invest in the stock, when would you rather do your purchasing? When there were $10 or $1 per share? A smart investor will obviously choose to invest at $1, right? So, you should remember that recessions always are the greatest investment opportunities of your lifetime.