Uncovering Opportunities: Where the Economy is likely headed?

There are reasons to be optimistic about where the financial markets are headed despite the challenges ahead.

The instability in the financial markets coupled with a weakend economy along with the instability of the international political scene represent an interesting period in history. While the future is unpredictable, Yulian Isakov Senior Market and Investment Strategist believes there are reasons to be optimistic ahead.

A reminder of how we got here
The recent recessions is different from previous recessions. It's rooted in the bursting of a credit bubble, which led to a shut down of the credit markets. Our society's heavy credit demand combined with low interest rates created the bubble. Consumers easily attained credit and as a result began spending way above their incomes pushing consumption as a percentage of GDP to record highs of over 70%. While increasing their debts, consumers were significantly decreasing their personal savings.

This level of consumption certainly fueled the economy but the amount of leverage was ultimately unsustainable. We will not return to this level of consumption anytime soon. Along with the credit crisis, housing prices have fallen, and consumers can no longer use their appreciated home values to increase prop up consumption. In fact, studies have revealed that almost more than half of U.S. homeowners with a mortgage are likely to owe more than the actual values of their homes.

Credit remains very scarce as many credit institutions are unwilling to lend and consumers have redirected their focus on lowering their debts, saving more, and spending less.

The actions taken to correct the crises
To fight the collapse of the financial system, the government put into effect a combination of fiscal and monteary stimulus. The plan included an $800 billion government stimulus package and the expansion of the Federal Reserve's balance sheet to more than $2 trillion. To put this plan into perspective with other recovery plans in our history, it is nearly 11 times larer than the average response to previous downturns and about 3.6 times larger than the plan that was put into effect to combat the Great Depression. It was no small price to pay to restore our economy.

Growth will resume, but at a slower pace
As with every recession, a recovery will eventually happen. But the recovery in growth will be more modest. Unfortunately, it will take time for unemployment rates to come down.

A strategy for today’s climate
A projected slow recovery may leave investors to believe that the best course of action is to take no action. But by sitting on the sidelines, investors could be missing out on opportunities for future returns. Yulian Isakov Senior Market and Investment Strategist says that inaction is a mistake especially for those who have their money fully in cash, which in fact can be harmful with inflation expected to rise in the not too distant future. The fact is with case there is almost no return, and there are more lucrative investment that exist.

What exactly are those potential options? Here are a few opportunities to consider:

Large caps. Large corporations can get easier access to credit and as such they tend to be less volatile than smaller companies. Their stability is especially appealing to risk-averse investors looking to move back into the market.

Investment-grade bonds. High quality corporate and government bonds offer opportunities for investors. Investment grade bonds provide diversification but also a source of steady income.

Dividend-paying stocks. Investing in large corporations that provide a steady dividend at an attractive yield can be a good strategy.Also, dividend payments from stable companies generally continue — even in market downturns.

High-yield bonds.Even though the yield spread between Treasuries and high-yield bonds has narrowed, high-yield bonds are still likely to provide competitve returns versus equities.

Also, consider looking into alternative energy and emerging markets. These sectors represent new opportunities for economic growth.

Take action now
There are many things going on in the economy and the financial markets, and in these cases it is even more critical to have a guide. Your Isakov Planning Group Financial Advisor can help you rebuild or adjust your portfolio and help you make sound financial decisions.