Savage says: Don’t do anything rash in uncertain world
BY TERRY SAVAGE email@example.com June 24, 2012 6:10PM
A trader works on the floor of the New York Stock Exchange. | AP file
Updated: May 3, 2013 12:15PM
Sure the markets and the economy are frustrating. But there’s nothing you can do to make things more rational. So don’t do anything — or at least don’t do much with your money now.
Whether you’re a confused stock market investor or a saver frustrated by low interest rates — this is not the time to make any big moves.
The best decisions are made by analyzing facts, but these days the financial facts seem to change day by day. That argues for staying pat in a balanced strategy if you’re an investor. When markets are irrational, you must stay disciplined, especially when so many key issues are truly out of our control.
Europe’s Financial Crisis: Each rescue plan has failed to solve the inherent problem that was created when Europe brought diverse countries into an economic union and a common currency without any control over the individual countries’ taxing and spending policies. Europe has fallen into recession.
Why does it matter to our economy? As Walt Disney noted many years ago, “It’s a small world, after all.” Many of America’s largest companies — think McDonald’s and Coca-Cola — derive a significant portion of their earnings from Europe. As Europe slows down, it impacts U.S. corporate earnings — and thus, the stock market. Also, many of our largest banks still own European debt. Fears of a European banking collapse disrupt the global flow of funds, further slowing growth in Europe and in America.
China’s Economic Slowdown: For the past few decades, China’s growth has depended on its exports — to the United States and to Europe. So with America in an economic slowdown and Europe clearly in recession, China’s exports have dropped, impacting their economy. That has caused the Chinese central bank to cut interest rates in an attempt to stimulate growth. But many global economists worry about the extent of China’s economic decline, noting that their statistics are not always reliable.
Why does it matter to us? China is also a market for many U.S. exports, including machinery and agricultural products. A slowdown in their demand is ultimately a negative for significant parts of our economy. The good news coming out of China’s economic slowdown is that they have cut back on their purchases of many global commodities. That is part of the reason for the falling price of oil, which leads to lower gasoline prices here.
Supreme Court Health Care Ruling: As the Supreme Court gets ready to rule on the constitutionality of all or part of the Obama health care reform law, many corporations are waiting anxiously to see how the ruling will impact them. Remember, small companies with fewer than 50 employees are exempt. But a reversal of part or all of the law would impact the nearly 18 percent of U.S. gross domestic product that is related to health care — and job creation.
Why does it matter to the markets? Aside from the obvious impact on everyone’s personal health insurance situation, this ruling — unless the law is completely upheld — will likely to throw the health care issue back into the hands of Congress in an election year. That means nothing is likely to get done. Some insurers have already said they will adhere to parts of the law — including keeping young adults on their parents’ policy. But everything from state Medicaid budgets to corporate planning will be impacted by this ruling — further slowing the economy and job creation.
This policy uncertainty creates a huge drag on our economy and on our future. Meanwhile, the global economic slowdown puts pressure on our economy, on job creation and on our stock market. Even the Fed is powerless to create enough stimulus to get our economy growing again in the face of all that negativity.
Banks have money, but they aren’t confident enough to lend. Some businesses have cash — but they aren’t confident enough to spend and hire. And individuals still aren’t confident that their jobs will exist, so they aren’t confident enough to buy new homes, even at record low interest rates.
Where does this leave individual investors and savers?
Investors: All of this uncertainty has led to dramatic swings in the stock market. A triple-digit loss one day is followed by big gains the next day. Even professional traders get whipsawed. Play it safe and ignore the daily headlines. Stick to your long-term plan of regular, diversified investing for your retirement.
Savers: The interest-rate markets are the most manipulated of all; the Fed has promised to keep pushing rates down. But when you seek out higher yields, you are accepting more risk — despite the promises of the salespeople. You may be willing to accept some of that risk for a portion of your savings. Make sure you understand how much you could lose if the Fed loses control and interest rates skyrocket in the future.
The United States can lead the world back to economic growth. It won’t be easy, but we’ve done it before. All it takes is leadership that inspires confidence. And that’s The Savage Truth.
Terry Savage is a registered investment adviser.