Here's the not-so-bad news: We are nearing a bottom. Housing prices are falling, but not as rapidly. Consumer confidence is up. Banks are earning money. The stock market in April had its best month in nine years. Even Nouriel Roubini, the New York University professor known for his dire economic predictions, thinks we are on the mend. Sort of.
That's not to say the recession is over. Roubini sees the road to recovery as a long and choppy one, with unemployment rising toward 12%. So don't trade in your emergency fund for a boat. But when it comes to your investing life, it's time to get back into the water. "People think that things need to go from terrible to terrific before they can invest," says Fidelity's legendary stock picker Peter Lynch. "But things only have to get to somewhat crummy for stocks to go up."
So while the risk of seeing what's left of our savings vaporized is fading, the question becomes: How do we ever get back the money we lost?
It depends on what type of recovery we have. Since the market bottomed on March 9, investors have rushed into acquiring shares of financial companies, retailers and technology firms. That makes sense if you believe we will have a recovery like the ones we've had in recent history. Companies in those industries did well in the market rallies that followed recessions in the 1990s and the early part of this decade. And stocks handily outperformed bonds.
But the current recession has been deeper and longer than the past two. "It's a very different story today," says First Eagle's Jean-Marie Eveillard, one of the few managers to produce positive returns when stocks plunged earlier this decade. "The landscape is different, and the recovery, when it comes, probably won't be along the lines of what we have seen in the post--World War II period."
So here are three ways to think about investing for any recovery:
For the past few decades, the easiest call in economics was to predict a V-shaped recession--one that bottoms and rebounds quickly. It's basically all we've had. Only two of the 11 recessions since the end of World War II have lasted more than a year, and nearly all wound up with a boomlet. Consumers stocked up. Companies upgraded their computers. We piled into real estate. And predicting a V may be the right call again. With the government spending billions on economic stimulus--trillions, if you include the bank fix--a quick pullout is entirely possible. In that case, buying retailers, technology companies and financial firms makes sense.
But at 16 months and counting, this recession looks more and more U-like--one in which a rebound takes time. That's the picture Roubini is painting. He says no amount of government stimulus can make us shoppers again--we have too much debt. When paychecks resume or start to grow again, lenders will get that cash, not retailers. Consumer spending made up as much as 70% of the economy before the bust. With less shopping, Roubini says, there is little chance for a quick rebound. "If we do everything right, we can avoid an L-shaped near depression, which you don't recover from," he says. "But you still don't get to a V."