Current Investment Climate Calls for Extreme Caution

Oil surged over $108.00 a barrel on Monday and this generated increased fears amongst investors concerning its negative impact on the U.S. economy. As I said in a recent commentary, oil has a real chance to break above $110.00 a barrel in the near term, although there could be some profit taking given the overbought conditions.

Add in the troubled housing market and declining housing wealth and you need to be really concerned. As I have commented in previous columns, the reduction in home wealth could cause a “poverty effect” to occur that makes homeowners feel they are less secure. This in effect would negatively impact consumer spending going forward. There is still no evidence of a near-term reversal in the housing market. Some pundits have already said that the housing market is in its own recession.

Recently, a report came out that the percentage of equity held in homes by Americans declined to below 50% for the first time since 1945, when records were first kept, according to the Federal Reserve. This is a concern, as debt in homes on average is now greater than the equity. The percentage of debt to equity could rise further if housing prices decline.

According to Moody’s, estimates call for about 10.3% of houses to have zero or negative equity by the end of March, which will clearly impact consumer spending.

The reality is that you need to be concerned about the negative implications of a weakening housing market that shows little evidence of turning around in the near term. The economy is under the real threat of a recession this year and this will impact stocks, especially cyclical companies and small-cap stocks.

Prudence would be a good strategy in this investing climate. Taking unnecessary risk can leave you vulnerable to selling and force you to the sidelines.