The Great Recession ended 5 years ago but the subsequent 5 year economic “recovery” remains less than stellar- for a larger portion of the country. Why? Because one vital piece to the economic puzzle is still missing. Without that piece we can’t expect to see the economy return to full health and allow the stock market to move in the best-possible direction.
Biggest Asset:
For most people, their home is their single largest asset- especially for middle and lower income families- and many of these families are still under-water (owe more than what their home is worth). What does that do for one’s psyche and desire to “spend?” Since the overwhelming majority of the population fall into this category, I like to look at both housing markets to ascertain the overall health, and direction, of the economy.
Economic Dichotomy:
The following charts illustrate exactly what we are seeing on Main Street (the economy). On average, upper income families are thriving while middle and lower income families continue to struggle.
Investing In Stocks:
The S&P 500, which represents the market as a whole, is trading at fresh record highs which is GREAT for people who invest in stocks. The problem is that most of the country is under-invested in the stock market. Why? Either because they do not understand it or were scared away from all the horror stories they have heard about people losing money. The good news is that anyone can educate themselves and learn how to make big money investing in stocks- AND control their risk.
Investing In Real-Estate:
At the same time, many people own a home or have the desire to buy a home because it is part of the American Dream. So what happened in the early 2000’s (and became a major component that caused the 2008 financial crisis)? Countless people thought they could not lose money investing in real-estate and that home prices would only go straight up. They began buying like crazy, took out excessive loans, got in over their heads, and then the house of cards came crashing down.
Big Lesson:
One major lesson savvy investors learn from the housing boom/bust is to always respect risk. By definition, every investment (housing, stocks, business, etc) has some element of risk- the key is to have a plan on how to handle risk, not avoid it. If you let the risk scare you out of making the investment, you will never be able to participate in the upside (reward) of the investment.
Bottom Line:
In order for the economy to gain traction and begin growing at a healthy rate- I’d like to see the entire housing market (not just the luxury market) improve markedly. All things being equal, that is the one missing link for the economy to kick back into gear and thrive again.
