Will next year be the lousy one? Some economic numbers are looking pretty soft. Over the summer, growth slowed to 2.2 percent, down from the zippy 4.7 percent that was registered last spring. Republicans warned of an impending ““Clinton recession’’; Democrats called it their perfect ““Goldilocks economy’’–not too hot, not too cold, just right.
Unfortunately for Goldilocks, some vital demographic data indicate a cooling trend. The number of young householders is dropping off, and they’re the secret spark of economic growth, says Richard Hokenson, chief economist of the investment bank Donaldson, Lufkin & Jenrette (DLJ) in New York.
Hokenson ties the level of consumer spending to the number of 25-year-olds in the United States. At that age, men commonly marry for the first time and move into their first grown-up home. More than any other age group, Hokenson says, young people drive the market for housing, cars and durable consumer goods.
‘Baby bust’: This critical cohort flowered over the past three years, spending money and putting business profits up. But not for nothing is their generation called the ““baby bust.’’ Their numbers, now in slow decline, will drop precipitously in 1997.
When fewer young shoppers hit the malls, consumer spending flattens or drops, Hokenson says. ““Flat’’ best describes third-quarter sales; ““down’’ describes his guess for 1997. Corporate profits are already getting dinged–never a good sign for stocks. So far, the consumer stocks are meeting Wall Street’s current earnings expec- tations, says DLJ’s Jennifer Moran. But sales are disappointing, which doesn’t augur well.
A similar worry, from a different perspec- tive, comes from David Levy, director of forecasting for the Jerome Levy Economics Institute in Mt. Kisco, N.Y. Banks are currently granting less consumer credit–a poor omen for the holiday shopping season. Consumers have beefed up their personal savings rather than spend their wallets dry. The savings rate currently stands at 5.4 percent, a big jump from the second quarter’s 4.3 percent.
If these trends continue, corporate profits could dip through the middle of next year, Levy says. Even in this quarter, earnings for 113 companies came in lower than projected, reports economist Edward Hyman of International Strategy and Investment in New York.
Some analysts think we’re looking at a brief and temporary dip, with minimal damage done to stocks. If so, you’ll cheerfully chug along with your current investment plan. But you need a fallback, just in case there’s a serious market rout. By thinking through the issues now, you’re less likely to do something dumb.
For the past 15 years, the single best strategy has been to buy and hold brand-name stocks and mutual funds. Prices dip occasionally, but when they rise it’s to astonishing new heights. Historically, stocks have always left all other types of financial investments in the dust. Some advisers choose stocks for their clients’ entire retirement-investment fund.
Shelby Davis, who runs the respected Davis New York Venture Fund, says he’ll buy on any price dip that the near term brings. He argues that enormous profits lie ahead, especially for American firms. ““The whole world has opened to business opportunity,’’ he says. ““Technology is creating enormous new markets, just as railroads and the telegraph did in the 19th century.’’ On his current buy list: Citibank, Wells Fargo, Morgan Stanley and American Express.
Nevertheless, he advises you not to invest any money you’re going to need within five years. New York Venture itself lost money in its first five years because it bought into the bad bear market of 1969. Stocks are truly for money that you’ll leave alone.
Fast lane: Life in investing’s fast lane, however, hasn’t always felt this good. In the 16 years from 1966 to 1981, stocks flirted roughly five times with the then high level of 1000 on the Dow. Every time they fell back down. After inflation, investors lost money if they merely bought and held. So instead, they practiced market timing: buying on apparent upswings and selling (they hoped) before falling prices erased all of their previous gains.
This bit of history suggests that today’s buy-and-hold is a temporary market mantra, not an eternal truth, says economic consultant Peter Bernstein, author of the recent book ““Against the Gods: The Remarkable Story of Risk.’’ Maybe stocks will stall, as they did in the 1970s, bringing market timing back. Maybe they’ll drop further, and stay down longer, than any investor now expects. ““If, five years from now, the Dow is at 3000, will you still have the stomach to hold?’’ Bernstein asks. If the answer is no, you’re keeping too much of your essential money in stocks. Pare down until you can answer yes.
Bernstein isn’t predicting a giant market drop. His point is that none of us can know, so it’s dangerous to make a heavy bet on any single investment type. To prepare for a post-election dip, spread your money over cash, bonds, real-estate trusts and international stocks, he says. You never know which one will pop.
