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During economic slowdown, consumers often delay basic
purchasing new products in these areas. Also, companies that
produce basic materials--such as chemicals, paper and
aluminum--often see a decline in earnings when the economy slows.
Noncyclical industries are generally
more immune to rising interest rates and a slowing economy.
Noncyclicals include food, drugs, tobacco and beverages--items
that people typically buy in good times or bad.
Thus far, we've looked only at
stocks. What happens to bonds when the economy cools
off? For one thing, if a slowdown begins to hurt a wide
range of stocks, investors may turn to bonds, viewing them as a
safer alternative, thereby driving bond prices up.
Also, if a slowdown is accompanied by low
inflation, that's good news for bondholders because the flip
side--higher inflation--is a threat to bond prices.
Why? Bonds provide a fixed interest rate, so, in periods of
high inflation, the purchasing power of your bonds will drop.
Furthermore, if rising inflation is
accompanied by higher interest rates, bond prices could
suffer. If, for example, new bonds pay a seven percent
interest rate, and your bond only pays five percent, then, if you
want to sell your bond before maturity, you will have to do so at
a discount, because no one will pay full price for the lower
yield.
Before you make big changes to your
portfolio in response to an economic slowdown, remember one thing:
For more slowdowns, there's usually been a rebound at some
point. So don't abandon your long-term financial
strategies. Look for high-quality investments--and stick
with them.
And above all, don't lose sight of your
objectives. If you can discipline yourself to look beyond
the temporary downturns, you've got what it takes to become a successful
investor.
Chris
Pridnia, Investment Representative
Edward Jones
942 East Garrison Boulevard
Gastonia, NC 28054
(704) 861-9121
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