Personal Finance Advice

Retailers had already reported that sales were slower than expected during the holiday season.  Now credit card companies are saying the same thing,  a slowing in spending and an increase in late payments.

It also seems that high energy prices are finally catching up with the economy.  No matter how much people want to cut back on spending at the gas pumps, they’re daily commute isn’t going to change.

Analysts say that people aren’t using less gasoline, they’re just paying more for it.  So, basically many consumers now have less disposable income for other segments of the economy.

We haven’t even seen how high the price of gas will rise yet.  The price of a barrel of oil rose about 60% last year, an increase that hasn’t fully translated to the pumps yet.  When that happens, you can expect consumer spending to fall even further.

While the price of oil has retreated somewhat after breaking the $100 barrier, inflation concerns still hound the economy.  The price of gold broke the $900 barrier for the first time recently and other commodities are also trading at near record highs.

With reports that the economy was slowing last quarter, this could be a painful double whammy for consumers if the economy does sink into a recession. 

Some analysts say a recession is coming and some say it isn’t. What is for certain is that the stock market has grown increasingly volatile since the summer. While this increases the risks for investors it also increases the chance for reward.

Large movements swings have been the norm the last few months depending on whether the daily news was good or bad. If you had idling cash lying around it would open the opportunity for some serious bargain hunting. There are quite a few stocks that are trading below their historical PE or price to earnings ratios.

Now the big question for many bargain hunters is whether it’s time to jump back into financial stocks or not. There are some big names out there that have lost a large chunk of their market values after they started reporting huge writedowns during the month of November.

While some of them do look tempting, I believe it’s still too early to jump back into financials.  Another surge in defaults is expected after rates adjust upward this quarter for the many ARMs that weren’t affected by the government’s bailout plan. There is also the fact that we are still in a credit crunch and while we may get it under control sometime soon in this country, that may not be the case for the rest of the world.

The housing market is also expected to continue it’s slump well into this year and possibly the next. So, while the financial sector may get it’s house in order and implement smarter lending practices, at least in the short run there just won’t be as many avenues open for profit potential as there were in the past.

However, this is definitely a sector that needs close attention in the next few months. Finding the right time to get back into these stocks should net you a tidy bit of profit as they climb back to their historical PE levels.

On the first trading day of the new year, oil prices finally broke the $100 barrier, closing slightly below that figure.  Now many people are wondering if this price is sustainable and how much higher energy prices can rise.

Some analysts feel oil could go as high as $120 in the upcoming months.  The future actions of the Fed and the subsequent effect on exchange rates will be a large determinant of this.

Investors also received some gloomy manufacturing data today which fueled renewed recession concerns once again.  Whether this will prompt another Fed rate cut is anyone’s guess but the future’s market is certainly betting on it.

The next few months could be very important to how the economy will play out for the rest of the year.

Key Components To Watch For

• How high will defaults rise?  The majority of the adjustable rate mortgages that weren’t affected by the government’s rate freeze will adjust upward this quarter and we could see defaults surge once again.
• How effective will the Fed’s joint liquidity plan be?  The Fed joined with four other central banks to combat the global credit crunch.  We should start to see some signs if credit markets are easing somewhat.
• How high will inflation rise?  December saw inflation numbers rise higher than what economists were expecting.  If that continues, it may tie the hands of the Fed.
• How will politics affect the economy.  For whatever the reason the market usually loves an election year.  It will be interesting to see if the pattern holds true during these turbulent times.

These are just some of things that will shape the course of the economy in 2008.  As difficult as the last few months were I’d say the Fed has done a reasonable job thus far in keeping the economy out of recession.  It remains to be seen whether they can keep up their balancing act into the new year.