Vicious Circle of Market Volatility Could Mangle Your Recovery

When conservative institutions like banks start declaring the economy’s in danger, it’s time to take notice.  Six months ago, Carl Tannenbaum, chief economist for Northern Trust in Chicago, thought there was a five percent chance the U.S. will sink into another recession.  Now he calculates a four to five times greater chance with the odds at twenty to twenty five percent if stock market volatility persists.

Much of this has to do with how seriously investors take the huge dips in the stock market we’ve been encountering.  As Lindsey Piezga, chief economist at the brokerage firm Stifel Nicolaus & Co. says in the same article, “Volatility, constant headlines about increased risk of recession and a slowing global economy are going to make the average American very nervous.”

You bet I’m nervous…

What we’re entering is a cycle of pessimism and reduced spending.  If consumers think the economy is bad based on what they hear and read, they’ll hold back and spend less. When they spend less, the economy will worsen.  And when the Dow Jones plummets more than 500 points, as it did last week, proponents of stocks will have a difficult time persuading frugal consumers to reach for their wallets, especially with every day bringing news of more layoffs and store closings – a recipe for market volatility if ever there was one.  At this point, even the Federal Reserve might consider holding back on the next planned rate increase.

Jerome Booth, chairman of New Sparta Asset Management in London, reports “Markets are terribly confused.”  Investors are uncertain where to put their money.  According to Mark Zandi, Moody’s chief economist, a ten percent slip in the economy would obliterate $2 trillion in wealth. If we get to this point, companies will be inclined to delay investments and reduce payrolls.

What’s making this particular stock market even more troublesome than previous ones is the fact that the current American economy is fueled by a greater number of high-income investors.  If they decide to pull out at once, the economy’s loss of wealth will move faster and be more severe.

Which begs the question: When investors who really know what they’re doing flee the market, where do they go (and is there room for us)?  The answer, according to the Wall Street Journal’s “Moneybeat” blog, is gold.

“The combination of stresses is burnishing precious’ metals’ traditional safe-haven appeal.  ‘We have derived a fresh round of safe-haven buying, with risk-off sentiment up,’ said James Steel, precious metals analyst at HSBC in New York.  ‘There are now enough reasons for gold to have some attention now, geopolitics, economics, currency unrest and haven seeking,’ RBC Capital Markets Managing Director George Gero said in a note.”

Why gold?  Because physical gold isn’t compromised by layoffs, poor management or a company’s outdated product line.  It’s also not intimidated by market volatility.  What’s more, gold’s value is slated to go up due to a curtailed supply.  According to research by Thomson Reuters’ GFMS, global gold production will decline by three percent this year, putting an end to a seven-year trend of rising output just as everyone’s looking for gold.

So the bad news is the risk of another painful, 401(k)-draining recession has dramatically increased.  The good news is yes, there’s still room in the shelter to which the rich and canny have already fled.