Tom Scollon
Tom Scollon
Chief Editor

The US markets had an extraordinary move up during the last week or so in anticipation of a 50 point move on interest rates by the Fed. The market was trying to second guess the Fed and that is one thing Bernanke is keen to avoid. That makes sense.

So when an decrease of only 25 basis points was handed down last Wednesday, the market foolishly turned on itself and the DOW fell almost 300 points. What a spoilt brat.

Or was it because there is a deep underlying concern about the possibility of a recession? The ‘R’ word is on the tip of the lip of most journos in the US, yet many analysts are still on the sidelines as to whether a recession is on its way – not that economist and analysts always get it right.

So what is a recession and what effect may it have on the markets?

A recession is a fall in GDP (gross domestic product) over two or more consecutive quarters. One of the curious things about recessions – as I have been around long enough to have seen a few – is that they can take place before your very eyes without you knowing it. This is especially so when they only last two quarters. Of course, they can span a number of years, although at this point I do not imagine traders in OZ will have to endure a long downturn – and maybe none at all.

In OZ we do not see any signs of a recession but in the US it is conceivable that the economy is already in one. Recessions don’t stand up and wave at you. It is not until you get the official economic figures that you know it has happened. It is unlikely that the fourth quarter of 2007 will turn out to be a recession quarter for the US but it is possible that December 2007 is slipping into negative growth. It is unlikely that we will get confirmation of a fourth quarter recession in the US until April 2009. And it is possible that by then it will be ‘all over bar the shouting’.

The markets are surprisingly resilient given the threat of a recession, but the major market players look months ahead and may have already factored in a recession – and a recovery!

So if the US sneezes will we catch the cold? And what about China, India, Japan, and Europe? The US is still the monolithic world eco powerhouse and there will be some slowdown globally in the event of a recession but it is unlikely these other key economies will become basket cases. The extent of their sniffling cannot be predicted at this point.

There are buyers out there quietly buying our market. There is still money to be made. Be careful about standing on the sidelines and saying this is all too hard.

Go out and get your fair share.

Enjoy the ride!

Tom Scollon
Chief Analyst