Despite the recent rally, some stock market analysts are still concerned about a possible economic slowdown that could lead to a recession. You can count Ms. Liz Ann Sonders, Chief Investment Strategist for Charles Schwab & Co. Inc., in that camp.

In a letter sent to Schwab Institutional clients, she makes several interesting points that might give concern to stock market bulls. She is not impressed that most economists surveyed by the Wall Street Journal are still predicting economic growth between 2.7 and 3 percent for the next three quarters and none of these experts are predicting negative growth for any one of those quarters.

She also points out that in late 2000 the consensus of economists for the first quarter of 2001 was for the GDP (gross domestic product) to grow at a 3.3 percent rate. In fact, that quarter turned out to have a -0.6 percent growth rate. Her point is that recessions usually do not reveal themselves, making them difficult to predict.

She has three major economic concerns that when added together (in her opinion) increase the chances of this country entering a recession in the near future. Her first concern is the inverted yield curve, when the 3-month Treasury bill has a higher yield than the 10-year Treasury bond.

Historically, an inverted yield may be a pre-cursor to a future economic slowdown or in a worse case scenario, a recession. However, Ms. Sonders also points out that when the Fed knowingly inverts the curve like they did in late June, the odds of a recession happening increase dramatically. There have been six such inversions in the last 33 years with five of them resulting in a recession.

Ms. Sonders also points out that the last five recessions have been preceded by spikes in oil prices and the longer we go before oil prices settle down, the harder it will be for the economy to ward off an economic slowdown. The third major concern, in Ms. Sonders' view, is this country's slowing real estate market. For this July, mortgage applications were down by almost 30 percent from a year ago. In the last several years, mortgage equity withdrawals have basically replaced wage gains as the main source of income gains, thereby becoming the main driver of our strong economy. With consumer spending accounting for two thirds of the GDP, any pull back in that area will result in some form of an economic slowdown.

Ms. Sonders also points out that investors should focus more on long term goals and not panic when making investment decisions. She suggests that you might want to consider reducing your domestic and international equity allocations by five percent each and increasing cash allocations by 10 percent as a hedge against potential, short term economic problems.

The recent stock market rally has been fueled in part by the uneasy truce in Lebanon and also because there is a growing belief that the worst of the oil crisis is nearing an end. Congress is in the process of passing bills that will allow more oil production in this country, especially in Alaska. At no other time in history has this country depended on a higher percentage of foreign oil, a situation that many feel needs to change.

It is important to remember that Ms. Sonders' main point is that any of the three major concerns listed above, inverted yield curve, oil crisis and the slowing real estate market, taken by themselves would not be a major concern, but when all three occur at the same time the chances for economic troubles ahead are greater than they have been for several years.



Pat Holland is a certified financial planner and fee-only investment advisor with Van Hulzen Asset Management at 711 Court St., Jackson.

He can be reached by calling 223-3444. Questions may be submitted online at p.holland@sbcglobal.net or mailed to the above address.