It's counter-intuitive, but recessions are often the best time to be buying shares. You just need to take a little risk. Be bold, brave Fools.
It's no secret that I'm bearish on the global and therefore the UK economy. I could roll out all the points again, but I'm sure you know them all by now. In short, the UK is up the creek with no paddle.
But guess what? We're not the only country struggling. The US economy is hardly on fire, and is up to its neck in government debt, just like most of Europe. Even China, although it is growing, is growing at a much smaller pace than it was. As for Japan and Eastern Europe, it's best we not even go there!
We're Knackered
Of course, we shouldn't hide from the cold facts. Outside Japan, of the major Western economies, the UK is forecast to shrink the most. Our public finances are knackered, our financial services industry has been decimated, we are running out of North Sea oil, and our manufacturing sector has been uncompetitive for decades.
Where's the future growth going to come from?
I'll tackle that question another day, but the simple answer is "our people". Believe it or not, we are a relatively smart race of people, and smart people are quite good at working out ways to innovate, create and profit. It has happened before and it will happen again.
Moving on…
Bad Economy, Good Stock Market
I'm bearish on the economy but generally bullish on the stock market.
Not every share mind you, because there are plenty of highly indebted and shrinking companies that are going to struggle to make it through this recession unscathed -- regional newspaper group Johnson Press (LSE: JPR) and themed pub group Regent Inns (LSE: REG) spring to mind.
Not every sector is going to take of either. It's going to continue to be a struggle for the retail sector, especially companies like Marks & Spencer (LSE: MKS), Next (LSE: NXT) and DSGI International (LSE: DSGI), even though in the recent past, I've said the latter company might be an interesting turnaround story. The collapse of Woolworths and the near collapse of JJB Sports (LSE: JJB) highlight the pitfalls of investing in this ultra-competitive sector.
Three Simple Reasons To Be A Stock Market Bull
All that said, it shouldn't be too difficult to reconcile how I can be a bear on the economy yet bullish on the stock market. Take these 3 simple reasons…
1) Valuations. Many shares are trading at prices which effectively say the economy will never recover and the companies themselves will never grow again. In This Recession Is Gonna Make Me Rich, I highlighted six dirt-cheap and growing companies. There are plenty more.
2) The alternatives. Put you money in a 'high interest' savings account and earn maybe 2.5% interest, per annum. Go on, click on the link and check out the gory truth yourself. What about government gilts? The 10-year gilts are currently yielding 3.3%, but if inflation does rear its ugly head, you could find yourself sitting on a capital loss.
3) Recovery. The global economy will recover. The stock market will recover before the economy recovers. Don't expect the economy to suddenly take-off and get us back to the go-go days of 2007, or the FTSE 100 to surge above 6,000 anytime soon, but expect a recovery at some stage.
Let me elaborate a little on the last point. I still believe the stock market will remain relatively range bound for a large part of this calendar year. It will have up days and up periods, like it's having now. Enjoy them whilst they last.
There will be down days and periods again too. The poor economic news is going to keep coming for the next 6 to 9 months at least, and possibly even longer. The economy is going to get worse before it gets better. Be prepared for more stock market volatility, and be prepared for days when the FTSE 100 falls 5% or even more.
Just Take A Little Risk
None of this should change your investing strategy. If, like me, your glass is half full, you believe in "our people", and you are willing to take some level of risk, this remains an excellent time to be investing in the stock market, for the long-term.
As I've said a number of times before, whatever the market does, my three-pronged strategy remains the same…
1) Invest regularly in a cheap index tracking fund.
2) Buy quality companies trading at fair valuations, such as those recommended in The Motley Fool's Champion Shares premium stock recommendation service.
3) Buy regularly, using a low-cost broker, like The Motley Fool's Share Dealing Service, for example.
As ever, I wish you happy investing.
More on the economy and the markets:
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> Bruce Jackson does not have a beneficial interest in any of the companies mentioned in this article.
