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The recovery debate

The recovery debate

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Economists are beginning to look to signs of a rebound, but signals remain mixed

ARE we facing an economic headwind or a tailwind - a correction or a recovery? That's the question on many economists' lips.

If you turn on almost any business channel you will invariably find a debate between those who believe the stock markets have turned a corner to recovery and those who think they haven't.

There can be no doubt that the markets are performing better. The S&P 500, for example, has been on the rise for 11 of the past 13 weeks.

And at the end of last week all of the major Wall Street indexes booked their third straight weekly gains. The Dow Jones Industrial Average rose 3.1 percent, while the S&P 500 gained 2.3 percent and the Nasdaq climbed 4.2 percent.

But though the markets are up about 40 percent from their 12-year lows in March, there is still a lot of uncertainty. Even Federal Reserve Chairman Ben Bernanke said last week that the recovery would be slow. "Data shows the economic contraction may be slowing, but unemployment will continue to rise for some time," he said.

He added that he still anticipates that the economy will start its recovery later this year, but cautioned that "we will have a weak labour market for some time".

On Friday the latest - and much anticipated - jobs data showed that while unemployment had reached a 26-year high of 9.4 percent in the United States, the pace of job losses had actually slowed.

However, other economic concerns are emerging.

Last week, oil ended at US$68.44 a barrel, down from a week high of $70. And while rising oil prices could signal the emergence of a stronger economy, such increases could also mean rising inflation. There was speculation last week that the Federal Reserve could increase interest rates if there were signs that the US economy was recovering.

While Bernanke's comments about recovery later this year and last week's improved economic data are noteworthy in gauging the general direction of the markets, we should continue to exercise some caution. As always, it is dangerous to take a short-term view of the market because this would be tantamount to trying to "time the market" which is always a risky practice.

Those who have sat on the sidelines waiting for the right time to invest might want to enter the markets now. However, they must be prepared to take a long-term view.

An alternative approach would be to begin "drip-feeding" investments into the market by buying stocks or funds on a monthly basis. Investing in such a manner brings with it the twofold benefit of buying stocks and funds at reasonably low prices and guarding against any further corrections.

By taking this drip-feed approach, investors will not miss out on a recovery play but also will not be caught out in the event of any further downturns. But much like the lump-sum investor, the monthly investor must also take a long-term view and wait as the recovery debate continues.

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Trevor Keidan is managing director of Infinity Financial Solutions. Should you wish to contact Trevor, send an email to [email protected].

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