Investors Pessimistic About Economic Recovery
MICHEL MARTIN, Host:
I'm Michel Martin, and this is Tell Me More from NPR News. Coming up, in the latest in our series, Tell Me More About Black History, we're talking about one of the key events that led up to last November's historical election.
But first, we're going to continue our conversation about most people's most pressing concern - the economy. The American stock market started the week with another decline, with the Dow falling to its lowest level in 12 years. And the market tremors aren't confined to this country. Stock exchanges all over the world have dropped to historic lows in recent weeks. Many observers blame America's economic crisis and unease over plans to help the failing financial industry.
Joining us to talk about all this, and what you can do to protect your own portfolio, is Tell Me More's financial adviser, Alvin Hall. Also with us is Sylvia Maxfield, associate professor of management at Simmons College in Boston. Welcome to you both, thanks for talking to us.
ALVIN HALL: Very glad to be here.
SYLVIA MAXFIELD: Thanks for having me, Michel.
MARTIN: Alvin, of course, as we just mentioned, the stock exchange first reached above 14,000 back in July 2007. On Monday it was close to 7,000. It's just painful even to talk about it, it's painful to part my lips even to say it, but ...
HALL: Fifty percent off the peak.
MARTIN: Have the domestic markets ever suffered such a steep drop before?
HALL: Yes. In the '70s, they dropped almost this much. The Dow broke 1,000, and before the market actually reached the bottom it was almost 50 percent. So, this is not unprecedented. What is unusual about this one is the breadth of it. There is not a single safe haven in any industry at all. For a while health care was holding up, it's dropped. For a while education was holding up, it's dropped. Things people purchased to hold for the long term - consumer goods such as diapers, baby formula, lotion, all of those things, everything is being affected by this because people are reining in their spending and they can no longer count on these companies being able to hit their earnings target.
MARTIN: Sylvia, some people are interpreting these declines as a market reaction to the Obama administration's stimulus package. Do you think that that's true, or are there other reasons?
MAXFIELD: I think the primary reason at this point is that we now have a full set of Q4 growth numbers, and they're pretty startling. So, for example, you know, we had a decline of 3.8 percent in the fourth quarter of last year in the United States. That actually looks pretty good by a comparison to many of the major economies across the globe. Japan was down 12 percent. You know, if you look at Korea down 20 percent, Euro zone down six percent, I think that those numbers reminded people that we're in a globally-coordinated recession, and where do you find growth when you look across the globe?
MARTIN: Would you have expected, though, to have - there have been some rally around the fact that the administration and Congress are acting and acting quickly, or do you think that the other underlying factors are just so strong, it's like such a strong current that that can't push it in the other direction?
MAXFIELD: Well, the funny thing about financial markets - it's what they're best at - is coordinating information, and they make guesses about the future based on the information that they have. So, I actually think that the rally that we saw in January and at the end of last year was a rally related to the anticipation of the stimulus package, the anticipation of some kind of financial sector bailout, the anticipation of a mortgage-related - a housing-related - package. So, we've got all those pieces on the table and now the market's looking forward, and it's going to take a while before we can really put our finger on a growth story globally.
MARTIN: Alvin, can we - talking about globally, looking at the stock markets around the world - European stocks are sliding, Germany's index fell to a four-year low yesterday, Japan saw a steep decline, what are they reacting to? Some are suggesting that they're reacting to fears about the future of U.S. banks. Do you buy that?
HALL: That is part of it, but a lot of those economies make the majority of their money on exporting things to the U.S. Germany is a huge exporter. You look at a country like Malaysia or Thailand, they also export huge amounts. So, if we in the U.S. and Europe are not consuming those goods, then those companies will not be able to hit their earnings target. So, that's part of the fear, and this contraction is continuing around the world. As people say, I've lived off credit for this amount of time, now the pendulum is quickly swinging back to people saving and not wanting to spend, and since the majority of the economies are driven by consumer spending, it's a direct effect.
MARTIN: Sylvia, if the markets continue to slide, is there any floor below which they can't go?
MAXFIELD: Absolutely, and in January there was a lot of conversation about the mini bull market that we saw being ephemeral, and that what we needed to see was something like 6,000 and that that would be a floor. So, you know, I think some time over the next couple of months we're going to see a floor like that, and then the stock market will at least stabilize and probably turn around a little bit. But I do think that there's a little bit more downside to see, and we're probably going to continue to trade based on announcements from the White House.
You know, the funny thing is, if you look at the markets' reaction to pretty much anything that's been said about the economy (laughing) coming out of the White House, it's been negative. So, there are folks out there who are saying, you know, (laughing) just be nice. If they stop talking and maybe - maybe the stock market would stabilize.
HALL: I would agree with Sylvia on that point, but I also think - I think there's another aspect to it. I think a lot of the traders on Wall Street and around the world have developed a sense that they can foresee the markets based on past trends. So, they look at what bonds have done in the past and what stocks have done in the past in reaction to certain news, and they think that the same things will happen again. What they forget is that we're in a new day. Nothing is predictable, and the most the administration can do is tell us what they hope will happen. But there's no guarantee that that will happen, and I think these traders who're used to living with uncertainty that they create are not used to living with uncertainty that's created by world economies.
MARTIN: If you're just joining us, you're listening to Tell Me More from NPR News. I'm speaking with Alvin Hall and Sylvia Maxfield about the global stock market, and we're also talking about the president's joint address to Congress tonight. Speaking of which, Sylvia, you just mentioned that the markets are reacting negatively to almost anything that the White House has to say, so what should - the president can't cancel the speech tonight, say oh, never mind, so...
(SOUNDBITE OF LAUGHTER)
MARTIN: What do you think he should say tonight to prevent further damage?
MAXFIELD: Well, actually, you know, he hasn't - he hasn't had the spotlight around the economy as much as Tim Geithner and some of the other people in the administration. So, my guess is that, you know, we won't have a negative reaction to his speech, and in fact it might be positive. You know, his tone has been so sober that I think it's hard for people to feel positively hearing his message, which is Alvin's message and everybody's message that we have to save more and spend less. And he's really been reinforcing that feeling.
Franklin Delano Roosevelt was vilified by the captains of industry in Wall Street in the United States before we got out of the Great Depression. And you know, I think the Obama administration - they know that history, and so they're trying to walk a tightrope between Main Street and Wall Street, and I ultimately think that they're going to have to make a bit more of a choice. And my guess is that they'll throw their hat a little bit more in with Main Street than Wall Street. And like Roosevelt, I think that the Obama administration will have to suffer some period of pretty serious criticism from industry and from Wall Street.
MARTIN: Well, Alvin, speaking of suffering, what should individuals do now? Of course, this always depends on who you are and where you are in life, how close you are to retirement and all these other individual factors. But short of just refusing to open your - those envelopes from your financial institutions, are there specific steps that individuals should be taking now?
HALL: I would not at this point continue to contribute to my retirement plan. I would...
HALL: I would put the money in cash. I would put it in a money market account in the retirement plan.
MARTIN: Just to be clear, you're not saying, don't contribute to your retirement fund, you're saying, take it out of equities and put it into cash...
HALL: And put - hold it in cash, yes. Because I think that a lot of people will feel - and I'm going to use a very strong term here - emotionally and psychologically scarred by this. I think it's very difficult to see your money go into the stock market and then watch it drop by five, 10 percent, day after day after day. I think that people would be better served if they are risk-phobic at this point, to put the money into cash, wait till the market settles down and reaches the 6,000 bottom - or whatever the bottom is that Sylvia mentioned - and then start to feather their money back into the market. That's what I think is more prudent right now, unless you have a very strong ability to stand downward risk.
MARTIN: Sylvia, what do you think about that?
MAXFIELD: Well, I think it partly depends on your age. You know, if you're lucky enough to be in your late 20s and have a good job, I think continuing to contribute on the equity side - you know, we're near some pretty big bottoms and so, if you're temporizing this 10, 15, 20 years, you know, the investments that you make today, you know, will appreciate considerably and you'll have an opportunity to decide when you want to get out in the future. But I think if your future - your earnings future is very uncertain, if you think you might be losing your job or if you're near retirement, I think what Alvin says makes a lot of sense.
MARTIN: Could I ask each of you, if you don't mind, what are you doing right now?
HALL: Well, I started getting out of the market around October 2007. And when Bear Stearns was acquired by JP Morgan, I was completely out of the market at that point. Recently, however, I have decided that the market may be hitting low, so I've been gradually moving back into the markets by buying at very specific bans. My first ban was 7,500. I put some money back into the market. And then as it drops lower, I increase the amount I buy, but I don't buy individual stocks. Instead, I'm buying exchange traded funds that represent both the Dow Jones industrial average and the S&P 500.
MARTIN: And does that represent both your tolerance for risk and also your anticipation of when you actually are going to need the money to retire?
HALL: Yes, it does reflect that. But I've been completely out of the market. And for a while I was in treasury, so I was earning a decent interest rate in treasuries. But with that rate effectively zero, now it does make a little sense for me to put a certain percentage - and it's a small percentage, it's between 10 and 15 percent - of the money that I have in the market back into the market. I think that during any bear markets there are rallies. And my aim is to take advantage of some of these short term rallies by layering into the market as it goes down.
MARTIN: Sylvia, do you mind if I ask you? How do you personally manage this kind of turmoil? I mean, because you're a person too, you have to retire at some point, one would hope, unless you're banking on Powerball.
MAXFIELD: Well, it's pretty clear I should have been listening to your show for the past 18 months because Alvin makes a lot of sense, and if I'd heard him say he was getting out in October of 2007, I might have done so. The problem with being an economist is, you know, it's the old, on the one hand, on the other hand. So, you know, you second-guess yourself constantly. I have my children's education fund almost entirely in cash. And they are about to go to college. So I have a very - unfortunately, our liquid wealth is accounted for by their need for college education, so my time horizon is very short. The first is going off to college next year. And so, it's very hard to figure out whether I should do much other than have it spread across banks that I think aren't going to fail in certificates of deposit.
HALL: Well, I think that's really a smart decision given the fact your children are about to go to school. Anything else places that money at risk. And I would not want that money to be at risk, given your needs. Michel, what did you do? Because you and I had this conversation, I remember, when Bear Stearns went under. Did you sell out?
MARTIN: I just listened to you, Alvin.
(SOUNDBITE OF LAUGHTER)
MARTIN: That's all I can say. Alvin Hall is Tell Me More's regular contributor on matters of personal finance and the economy. He joined us from our New York bureau. Sylvia Maxfield is an associate professor of management at Simmons College. She joined us from WGBH in Boston. I thank you all so much.
HALL: Thank you.
MAXFIELD: Thank you. What a pleasure.