It’s The Economy, Stupid

It’s the economy, stupid.

Remember that phrase from the 1992 presidential election campaign? The term was coined by Democratic Party pit bull James Carville, and it refers to the idea that then Gov. William Clinton was a better choice than President George H.W. Bush because the latter had failed to properly navigate the economy through a recession.

The more that things change, the more they stay the same.

Now it’s up to President-elect Obama to deal with the nation’s issues at hand, and once again, it’s the economy, stupid.

The biggest issue in a macro sense is the credit and housing markets. So far, government moves to help free up credit markets and bail out banks and financial institutions slammed by the subprime mess have been met with virtual indifference on Wall Street. Then we have a world economy in recession, and an overall sense that things are going to get much worse before they start to get better.

To put what we are all facing into a little historical perspective, consider the following statistics:

• There have been 13 recessions since 1929, and on average they’ve lasted 10 months.

• The longest recession ever was The Great Depression, which lasted 44 months.

• The recessions of 1973-1975 and 1981-1982 lasted 16 months each.

• In the 13 recessions dating back to 1929, the median S&P 500 bottom occurred 58% of the way through the recession.

I present these bits of information to you not to scare you, but rather to alert you as to just where we are right now in our country’s economic history. I think it is safe to say that we are, in fact, in the midst of a recession that started somewhere between the end of 2007 and the beginning of 2008.

Although the economy may not have technically descended into recession during this time period, the material effect of recession certainly was felt in the economy and the psyche of investors around the globe.

Given the protracted nature of recessions, and considering that what we’ve experienced in the market meltdown of 2008, I think we can say that this recession likely will be at least on the order of 1973-1975 and 1981-1982.

Unfortunately, there isn’t much a President Obama can do about this situation — save for some Keynesian scheme to spend more government money (i.e., your tax dollars) in a vain attempt to stimulate the economy. Sadly, I think this will have the perverse effect of doing more harm than good, both for the economy at large and for the equity markets.

So, what’s an investor to do?

One answer is to embrace what is so often the forgotten asset class, cash. Another answer is to pick and choose your spots carefully, investing in segments of the market likely to outperform the major indices based on strong sector fundamentals and strong technical momentum.

The bottom line here is that whatever you do, you have to realize that you are in a tough environment and that whatever action you take you are going to have to do so within the context of the profound epithet dolled out by James Carville — It’s the economy, stupid.