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Recovery from the recession: An L, U, V or W?

The economic recession, which began in December 2007, ended in July 2009 according to some market analysts. Not all economists agree that the recession is truly over, but the one thing they can all agree on is that recovery won’t be quick.

The US economy shrank at a nearly 6% annualized rate from September 2008 to March 2009, so it will be a long time before real progress is felt. The shape of the recovery growth curve is likely to be an L or a wide U, although unexpected negative news could easily turn it into a W.

Positive factors driving recovery include lower energy prices and a bottoming out of the housing market in terms of sales and construction. Home sales are up, and consumer spending has stabilized, in large part because of federal stimulus programs, such as the first-time homebuyers tax credit and Cash for Clunkers.

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The market has responded by gaining more than 40% since March. Of course, these gains are measured from a low base, so this seemingly impressive growth still leaves the economy more than 35% below 2007 highs. Remember, too, that the end of the recession only means that the economy has stopped contracting and is starting to recover, it does not mean it has recovered or even that full recovery is imminent.

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The positives are still fragile, and any new negative revelations could easily throw a monkey wrench into the fledgling recovery. Potential risks to recovery include spikes in energy prices and residual challenges in the commercial real estate market.

Even without any unexpected bad news, the US economy is unlikely to see immediate expansion. Job losses are likely to continue at least through the end of 2009 and possibly early 2010. In addition, with the two big stimulus projects in homes and cars over or ending, 4th quarter growth may slow again. Slow growth should continue through early 2010 before finally picking up.

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Increased growth probably means about 1% for the next few years, according to most economists. This is not enough for the average person to feel like the recession is over. The US economy requires at least 1.5% annual growth just to feel like it’s at a standstill.

Economic recovery begins with increased consumer spending. Businesses that sell directly to the consumer will thus recover first, followed by their suppliers. Recovery appears to have already begun in the inexpensive discretionary goods sector. Higher-priced discretionary items like houses and cars will be the last consumer sectors to recover. The increased growth seen in houses and cars in the 3rd quarter is temporary, due to federal stimulus programs. True growth isn’t likely until 2010.

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The recent economic news and outlook have been positive. However the economy is still fragile, and it’s too early to say for certain what path recovery will take. The only thing that is certain is that Americans will be feeling the recession’s effects for many years.

Investors may find a simple buy-and-hold strategy to have anemic returns over the next few years for their personal stock portfolios. Stock options enable option investors to add some zip and also add some protection to their stock investments. A covered call investing strategy enables option investors to turn current stocks in their personal stock portfolios to income generating machines. A put option enables option investors to protect their stock investments similar to home or automobile insurance.

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Investors can also combine the income generation from covered call investing and the protection from put options to generate income which is protected from a falling stock market.

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PowerOptions’ sister company PowerOptionsApplied provides expert stock option trading recommendations. PowerOptionsApplied specializes in covered calls, naked puts and iron condor stock options strategy recommendations. PowerOptionsApplied provides a 30-day risk free trial of its service.

[tags] economic, recession, US economy, Home sales, first-time homebuyers tax credit, Cash for Clunkers, commercial real estate, Job losses, economists, consumer spending, consumer, discretionary goods, federal stimulus [/tags]

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