If the women in your life are stocking up on lipstick, it might be time to tighten the purse strings. What you're seeing may not be a sign of vanity; it might be an economic indicator.
Leonard Lauder says that during tough times lipstick sales zoom at his cosmetics company, Este Lauder. When recessions set in, consumers tend to forgo luxuries and big purchases. Instead they concentrate their buying power on smaller items -- like lipstick -- to get their retail kicks. The tendency to hunker down and spend less when times are tough also characterizes investing when the financial news is bleak.
As the ghost of real estate past haunts Wall Street and economists try to discern where the buck will finally stop, Bankrate takes a look back at trends during previous financial meltdowns and what -- if anything -- we learned from them.
What Goes Up
Randall Parker, an economics professor at East Carolina University, says economists are about 50-50 on whether a recession is on the horizon, but if one materializes or not, slowdowns in general are normal.
One of America's first financial crises took place in 1764, when England prevented the colonies from producing paper money -- a move that advanced the cause of revolution. In 1819, the country suffered a recession following the War of 1812. Although other factors were evident (most notably banks overextending themselves), Parker says it's not uncommon for recessions to follow wars.
In 1837, the country entered a depression that lasted until 1843, a period historians have compared to the Great Depression of the 1930s. Collapse of a large life insurance company and falling grain prices combined to spook investors at that time. Land speculation, particularly that in the projected path of the railroads, also contributed to the bursting of this bubble.The collapse of a major banking company that was also the source of railroad funding was a contributing source to the Panic of 1873. The failure of a major railroad 20 years later would also sweep the country into panic.Short recessions dot America's financial landscape, but recessions are brief by nature, usually lasting from six to 18 months, and affecting all aspects of a country's well-being, from industry to employment.More recently, in 1973 and 1979, oil crises sparked poor economic health. The country underwent a memorable recession in 1981, leading to the bail-out of the savings and loan industry. In the early 2000s, the dot-com bubble burst, throwing tech stocks into disarray."Prices were already way out of line, so it was a great time to buy stocks," Parker says of the period following the bursting of the dot-com bubble.As for the immediate future, Parker says it's not looking so hot.
"We're in some awful squishy territory right now," he admits.We're forever blowing bubblesHistory is full of stories about investments that droppedspectacularly, taking fortunes and futures with it. One famous exampleis the tulip bulb craze in the mid-seventeenth century UnitedProvinces, known today as the Netherlands. Accordingto the most popular version of the story (historians and economists aredivided on the exact details and historical impact), tulip bulbs wereimported from Turkey. Due to the tulip's increasing popularity, pricesfor bulbs began to rise, eventually to ridiculous levels, whichprompted a wild rush of investment.Tulips were traded on local stock exchanges, with some fetching fabulous prices. Their increased value led to speculation. Large returns were made, but eventually the bubble burst and prices took a nose dive, no doubt leaving the Dutch sadder but wiser. Althoughwe like to think we're savvier than past investors, looking at thecyclical nature of investing, it's easy to see that the dreaded bubbleis inevitable. From tulips to railroads to real estate, we're alwaysfinding something to binge on and that leaves U.S. investors facing theaftermath of their own "burst" bubbles.They're not making it any moreBuying real estate is a sure thing. Not only does a real propertypurchase come with its own collateral, it will never lose its value.
Real estate is a great game for pros and a not-so-great game for amateurs Uh, not exactly. While it's true that real estate is generally a good investment, there's no such animal as a sure thing. That's where a lot of would-be investors got into trouble when the recent housing bubble burst."Residentialreal estate composite values are down about 8 percent and they're notthrough yet," says Ben Jacoby, Certified Financial Planner and senioradviser with Brinton Eaton Wealth Advisors.Jacobysays there is a four-year cycle of excesses. "Every four years or sothe people who loan money do something stupid," he says. Inthis case, investors made real estate loans to people who couldn'tafford them, including speculators. Investors purchased run-downproperty, renovating and reselling or flipping it, acquired propertyfor rental units and made pre-construction purchases -- all in hopesthey'd have a big return for their investments. Problem was, most of the property purchased was overpriced in the first place, and when values tumbled, speculators in general couldn't get their money back, much less the mammoth profits they'd anticipated. But even though real property investments can't really be taken to the bank, Jacoby says property has always been an investment target in good times or bad. Individuals like the idea of owning something they can actually put their hands on, but it's a much bigger gamble, even when prices are rising, for the uninitiated.
"Real estate is a great game for pros and a not-so-great game for amateurs," Jacoby says.Historically, investing in real estate during bearmarkets can yield some real bargains for those who can afford it. Sincelenders are understandably skittish when the economy is less stable,financing property becomes much more difficult. Would-be investors whohope to take advantage of falling home prices need to have enough cashto reassure the bank that its loan will be money well-spent.All that glittersGold is kind of like comfort food -- something we latch onto wheneverwe feel threatened. It's the meatloaf and mashed potatoes of finance.During political upheaval, wars, civil unrest and even when interest rates aren't returning much on investments, investors have seen gold as a safe haven. Comparing gold and stocks in the American markets, stocks have done very well against gold, but gold remains an investor favorite. Parker characterizes gold as a generally good investment. Gold (and silver, for that matter) back up Parker's assertion with a solid performance when weighed against stocks in the first few weeks of 2008.CFPJacoby says the weak dollar has boosted gold, which sold at historichighs at the beginning of 2008, then began a correction in earlyFebruary as the Fed cut the benchmark lending rate. However, whethergold rises or falls, investors are historically drawn to it.
"People stand by gold," Jacoby says. Foreign investments may not be for everyoneThinking of jumping into international waters when home waters aretroubled? Lots of people have. William Gamble, principal of EmergingMarket Strategies, says unless you know what you're doing, you shouldhold that thought or you might end up taking a bath.India, China, Russia -- they are all goingto have enormous (economic) problems Gamble,who writes frequently about foreign market strategies and helps clientsmanage risk in international markets, says that often one of the firstreactions investors have when their own economy starts wobbling is tosink their money into another one. He reminds investors that there'smore at play than simply finding what appears to be an attractiveinvestment. Investors have to understand the political and economicsituations behind the market to make it work for them.Gamblepoints to countries where free speech may be limited and manybusinesses are controlled by the state. He says it's within the bestinterests of the government to prevent economic problems from beingpublicized. So trolling for a good return on investments in China, forexample, may not be such a smart move."India, China, Russia -- they are all going to have enormous (economic) problems," he says.
Gamblepredicts recession will strike all three countries, with double-digitinflation in many parts of Latin America and Asia. That doesn't meanthere are no good buys in emerging markets, just that the averageinvestor isn't going to find them without professional assistance. Investors in Argentina at the turn of the centurysuffered the slings and outrageous fortunes of political instability --one of the characteristics often associated with an emerging market.Many of those who turned to emerging market mutual fundsin the mid-to-late 1990s saw enormous gains, which then plummeted,resulting in equally devastating losses. For example, in 1996, theLexington Russia Troika Fund went up 67.5 percent, only to drop awhopping 83 percent the following year."Now is probably a good time to invest in stamps," says Gamble, not entirely tongue-in-cheek.Don't get emotionally involvedWhen the going gets tough, many investors jump ship. Doug Charney,senior vice president of Charney Investment Group of WachoviaSecurities LLC, says the problem with many investors is that "they getemotionally involved in their investments."Definitions Bond -- A debt instrument issued to borrow money for a fixed amount of time and set interest rate.Commodity-- A physical substance, such as food, grains, and metals, whichinvestors purchase, usually through what are called futures contracts.Emerging market fund -- A mutual fund or exchange-traded fund that invests in less developed countries with high growth potential. See the Guide's Glossary for a further explanation of these terms.Beforethe dot-com bust, Charney says everyone wanted into tech stocks. When alot of tech stocks tanked, the rush to the exit was like someoneyelling "fire" in a crowded theater.
"When things get extreme, people get irrational," he says.There'salso what's known as a "herd" effect. When the market starts to showlosses, many times smaller investors will become spooked and get out.That, say many financial gurus, is exactly the opposite of what a goodinvestor -- particularly one who is investing for the long term, as inretirement -- should do.Parker says that although the tendency may be to cut one's losses and run, it's infinitely better to wait it out. "I'm a buy it and hold it kind of guy," he says.Whenthe country's in a recession, most people don't invest in stocks. Theyopt instead for safer investments like Treasury bills, CDs and bonds, or look at precious metal commodities. "Inthe case of recessions, stocks go down at the beginning and back upwhen the recession is over, and sometimes stocks even go up when therecession is still going on," Charney says.Charneyalso says that stocks going down before a recession is a leadingindicator that a recession is about to start, so once the recession ison the horizon, it's generally too late to sell without substantiallosses.When things get extreme, people get irrational," Mostpeople who lose big in the market during a recession jumped on the "hotthing of the moment," like the dot-coms or reaching even further back,railroad expansion. Charney says whenever there's a common buzz on a"sure thing" it's a good bet it's not sure at all.
Herecounts a famous story about millionaire John Rockefeller whoreportedly exited the stock market when his shoe shine boy startedgiving him tips -- about a year before the start of the GreatDepression. Everyone knows how that story ended.-- Posted: March 3, 2008Bankrate.com is the Web's leading aggregator of information on financial products including mortgages, credit cards, new and used automobile loans, money market accounts, certificates of deposit, checking and ATM fees, home equity loans and online banking fees.
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