Recession Recovery Predictions…and Penny Stocks

I don’t really recall too many analysts predicting that the Western World would tumble into a major recession. Nor do I recall many economists thinking the credit crunch would amount to very much.

Two years on, most analysts quoted articles I read seem to fall short of making any long-term predictions. Like the apparent death of “buy and hold” investing, a lot of analysts are toning down their rhetoric and holding their market predictions to short-term ideas.

After all, who wants to go on the record saying the economic recovery will be V, U, W, or Gravy Boat Spout-shaped and happen in the second quarter of 2010? It’s easier to simply suggest that the economy is going to slowly recover over the next few years. That way…if you’re wrong, no one is going to remember…and in your defense, you can just say that consumers were more optimistic than you thought they’d be.

That said, if you are going to make predictions, it’s better to avoid absolutes. Instead of using a headline like, “Current economic conditions in China won’t affect U.S,”…it’s safer to say, “Bear market looms in China, but it shouldn't affect U.S.”

Regardless, any penny stock investor familiar with the Asian Pacific economy will note that a bear market or bull market in an emerging market like China, whose economy is one-fifth the size of the U.S…isn’t going to lose sleep or get excited over it.

Or you can advise with caution. As Ken Goldstein, economist at The Conference Board said, "The indicators suggest that the recession is bottoming out, and that economic activity will likely begin recovering soon."

On the other hand, there are those who will advise you with gusto…on safer subjects. One headline article was entitled, “Why oil won't return to triple digits”. I remember a few years back wondering if oil would pass $60. Many thought that was a ceiling. It turns out $60 would be a great support level now.

Will oil climb above $100 per barrel? For starters, all commodities are priced dependant on the strength or weakness of the U.S dollar. With the dollar currently trading low compared to most major currencies, and unemployment numbers still strong, we can expect OPEC oil prices to trade within a tight range. The U.S. may not directly set global oil prices, but because it has the world's largest economy, the price will correspond with U.S. trends. For the foreseeable future, oil will not cross the $100 threshold.

Recessions are tough for everybody and it’s difficult to predict where the global markets are going. That’s why it’s best to listen to your gut, track down fundamentally solid penny stocks, and to rely on your own instincts more than those of TV commentators.

Unless, of course, they’re willing to post their tax returns online…then you can see for yourself if their investing acumen is as spot on as their opinions are. For many well respected money managers however, 2008 was the worst year of their careers; proof that even those most familiar with the ins and outs of Wall Street can get hammered.

If the brains of Wall Street are finding it tough to make an extra $25 million on the markets, where does that leave penny stock investors? As one financial writer noted, the best advice one can give during a recession is to take time to revisit your short and long-term goals…and adjust accordingly. And be willing to accept small returns for a year or two.

Even in a recession, most penny stock investors are still looking for strong returns. And why not? Yes, the prevailing myth is that inventors need to be in so-called “safe stocks” to make any money.

But that’s only true before a recession takes hold. Safer stocks do tend to decline less than riskier stocks. But, once the recessions is in, “safe” stocks can actually underperform because as soon as the markets begin to rally, it will be the most beaten down names that rise the fastest.

While safe and steady stocks may climb a solid 10%, fundamentally sound penny stocks may rise 50% or more during the rebound.

The fact of the matter is, the economy will continue to contract or display subpar growth. And growth will remain well below potential for a couple of years. That doesn't mean its wise to sit on the sidelines. If you're already in the markets and you've done your due diligence, it’s best to stay the course. In time…the markets will reward your approach.