Profit From A Recession

The Dynamic Wealth Report
January 7, 2008

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January is traditionally a time of massive mutual fund inflows.  At the strike of the New Year money starts flowing into 401Ks and other retirement vehicles.  Investors like you and I also have New Year’s resolutions that focus on retirement.  Sometimes it’s as simple as rebalancing our portfolio but most of the time it means investing more money.

All of this new money needs somewhere to go and typically flows to mutual funds.  Portfolio managers need to invest this new money quickly or fund performance can fall.  The size of the inflows (measured in tens of billions) normally has a very positive impact on the market.  When coupled with the repurchase side of tax loss selling, we experience the “January Effect” which is simply a cyclical rally in the markets.

But this year has been different.

On January 2, the first trading day of the year, the market fell 220 points.  The market closed out the first week of trading, a few days later, with the Dow at 12,800.  The Dow has now fallen 565 points in the worst, first week of trading seen in decades.  Needless to say, it was not the bright start to the New Year many investors were expecting.

Unfortunately, many look at the first trading day, and the first trading week as a barometers for the entire year.  With the recent poor performance, many investors are now fearful.  Throw in fears of recession and outlooks turn bleak very quickly.

Might a recession do us in?

Investor concerns are high given falling home prices, tightening credit markets, the decline of the US dollar, and rising commodity prices. 

Now, I’m not an economist, but 10 years of banking taught me something. Economists are constantly yelling “recession, recession” yet they tend to be wrong more than they're right.  This has led to the famous saying: “Economists have predicted 8 of the last 5 recessions.”

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•   Gold (Up 17.2%)

The gold industry is up more than 17% over the last month.  It has continued to surge in price crossing over the $870 per oz level.  But it's still far below its inflation adjusted high of around $2,200 per oz.  This has led many investors to suggest that we are still in the early stages of a gold rally.

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