The latest talk from the markets is that the global economy is back on track, but optimism must be countered with a healthy dose of caution
Was the recent rally real or just a Trojan horse, sucking investors into the markets before it was time? That's the question being hotly debated by market watchers right now.
At one point last Friday, stocks on the Dow Jones Industrial Average appeared to be heading towards their heaviest losses since July 17, driven down by weak consumer data. However, they staged a recovery later in the day to close down just 76.79 points.
One week earlier,all the talk was about rallies and recoveries as the markets closed at their highest since last year.
There have been a number of positive reports of late about the economy, but these need to be taken cautiously. For example, July's US unemployment figures were better than expected, with job losses of 247,000 compared with 443,000 in June.
However, the fact that a smaller number of jobs were lost in July than there were some months ago is to be expected, as most companies have probably already made all of the staff cuts they can without adversely affecting their own day-to-day operations.
Instead of job losses, what we should really be looking at is job creation and whether those companies who let people go in the first place are hiring them back. Similarly, we should be looking at the employment terms and conditions of those still in work. There is talk that some employees are actually working and earning less.
There are also reports that banks are still not lending money. All of these factors add up to the fact that there is less money in the economy.
Less money in the economy means less money being spent on companies' products. So while most companies' second-quarter earnings reports did come in better than expected, the results were driven by cost-cutting rather than growth.
All of this would suggest that any recovery is being driven by stimulus money. The question now is how long can the stimulus packages prop up the world's economies?
Last Friday, investors and the markets got a shot of realism. A report indicated that consumers might still curb their spending amid lingering fears they may still lose jobs due to the state of the economy. The consumer sentiment report came on the back of another from the US Commerce Department citing an unexpected decline in retail sales.
All this shows that while the business news channels and the general media, and indeed a lot of market watchers and investors, are focusing on the good news, the consumer is not yet on board.
As such, it might well be that the rally we have seen earlier this year has been driven purely by hope. And a recovery that does not include a confident, free-spending consumer might not last long.
So with all this uncertainty still in mind, the best way to keep financial plans on track is to implement the practice of dollar-cost averaging. This is the practice of paying a uniform monthly amount into an investment plan.
Paying regular monthly amounts into an investment plan will allow one to take advantage of the rallies if the much-talked about recovery does come to fruition.
It also allows one to avoid the risk of becoming sucked into a market too soon, before it has a chance to correct - again.
Trevor Keidan is managing director of Infinity Financial Solutions.
Should you wish to contact him send an email to [email protected]