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I’m regularly asked to explain economic news. “What does this news mean? What are the implications for me?” In response to these questions, following are three recent news clips with a lay persons guide to their meaning. Next, get an update on any implications for you, personally.
With the preponderance of economic news on television, on line, and in print, you are well served to separate the wheat from the chaff and spend your precious time on the news that has personal value.
Review the quotes and decide for yourself if they have implications for you, or not.
“I am very pleased the Fed took a pass on knee-jerk reaction that could have produced QE3. I hope this will take more air out of the commodity bubble in the ensuing weeks.” Robert Johnson, Morningstar.com, in No Knee Jerk Reaction, 8/27/2011.
What does this mean? This comment suggests that that in spite of slowing economic growth the fed did not react in haste by pumping more money into the economy and creating additional economic stimuli. There is a hope that commodity prices, which are at unsustainably high levels will come back to more reasonable valuations.
What should you do? Nothing. That’s assuming you have structured your investments with a sensible asset allocation and are investing regularly in your retirement account. Do not succumb to the hype and start investing in gold or other overpriced commodities. You will not win buying “high.”
“The latest sign of trouble for the economy came Friday when the Commerce Department revised down its already low estimate for second-quarter growth in gross domestic product. The economy grew by an annual rate of only 1.0% in April through June, not the 1.3% rise that was previously estimated. That was after GDP increased by just 0.4% in the first three months of the year.” Dow Jones wire, Morningstar.com, in Bernanke says Fed Ready to Do More 8/27/2011
What does this mean? The economy continues with slow growth. This means the gross domestic product (total goods and services produced in a year + exports – imports) or aggregate business growth will likely be sluggish.
What should you do? Don’t expect exceptional growth in your equities (stock investments) and diversify your investments internationally.
“Economic growth and stock prices don’t move in sync. If they did, Chinese stocks would be up 10% for the year, not down 2%, and U.S. equities would be flat.” Paul J. Lim and Susie Poppick @Money How to Invest in a Scary Economy, August 26, 2011.
What does this mean? Common knowledge and research purports that stock prices follow economic growth. Although true in the long term, the relationship is not linear nor does it hold true in the short term.
What should you do? Invest some of your assets in faster growing economies as they have a good likelihood of superior growth. Keep some of your asset allocation in faster growing international index funds or etfs. Understand that the out sized growth may not be reflected in the short term and that patience is required.
ACTION STEP:
Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it to keep all of your personal finance goals, thoughts, activities, and plans.
Listen or read the current economic news with a critical viewpoint. Do not react impulsively to the headlines or you will be changing your investments daily, an unwise practice.
What is your method for evaluating the media?
image credit; brizzle born and bred
