Will Other Countries Follow United States' Lead Into Recession?

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Global Economics Just a Game of "Follow The Leader'

Talk of Recession in the United States Spreads to Other Parts of the World

January 27, 2008
By: Jerry Cole - Retirement, Investment

Leadership carries with it awesome responsibilities. It also means others will follow your example and direction. So if the U.S., as the global economic leader, begins to pull back, it seems other countries will follow.


The fear of recession in the U.S. spread to other parts of the world early last week and caused a massive sell-off in prices abroad. Monday, while the U.S. market was closed for the Martin Luther King Jr. holiday, major indexes fell 7.2% in Germany, 7.4% in India and 5.5% in Britain.

This in turn rattled the U.S. market which promptly plunged 464 points in the early going on Tuesday.before the Fed stepped in and cut interest rates by a full three quarters of a percent. That represented the single deepest cut in the Fed's main interest-rate target in more than two decades. The move shored up confidence, at least for the moment, and the Dow Jones Industrial Average moved up, but still closed out the session on Tuesday down 128.11 points. That put the Dow down 9.8% for the year.

Wednesday's gain on the Dow of 298.98 points, followed by a gain on Thursday of 108.44 points lent new confidence to some investors. However, on Friday the market's wild week closed out on a negative note, as stocks slid and jittery investors again bid up prices for the traditional havens of Treasuries and gold. The Dow Jones Industrial Average closed on its low for the day, off 171.44 points at 12207.17.

A remarkable outcome of this year's economic slow-down is that Congress and the White House were able to reach a deal on a stimulus plan in record time. On Friday it was announced that the centerpiece of the package is $100 billion in tax rebates for an estimated 117 million families. Most individual taxpayers would $600 and working couples would get $1200.

Businesses would be able to deduct an additional 50% of the cost of certain investments. One provision raises the dollar limit on mortgages that can be bought or guaranteed by Fannie an Freddie. The total stimulus package hammered out by Congress and the White House should put $150 billion into the hands of consumers and businesses and help revive the market for large mortgages.

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The current limit on mortgages that can be bought or guaranteed by government-sponsored mortgage giants Fannie Mae and Freddie Mac is $417,000. It would rise to $600,000 and perhaps as high as $730,000 in the most expensive areas. This part of the package is of little value to us in the Tri-Cities area and indeed to most areas in Michigan as a whole. However, other parts of the package should help our economy at the local level. The goal is to get the money in the hands of consumers as early as May of this year.

The volatility we have endured in the market this year has given us a true test of our tolerance to risk. It may be that in the current environment of global economies all interacting, and to some extent dependent on each other, that we will experience more volatility than the norm. It is difficult, but we have to be sure not to react to short-term volatility or to panic to daily headlines. Retreats have always been part of investing. Yet, the markets have followed every decline with record highs. The up moves have not been without interruptions, and they can take awhile to get started....often unexpectedly. But every decline has been followed by an advance.

Remember to think in terms of percentages. The Dow on Friday's close of 12207.17 is down 13.8% from its previous high of 14164.53 set last October. To meet the classic definition of a bear market, it has to fall 20% below its previous high. It is also important to not try to time the market. That is difficult if not impossible. So keep your risk within your tolerance and keep ahead of inflation.

I invite your questions.

(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)