Markets and Investments After the Debt Deal
MR. KOJO NNAMDI
From WAMU 88.5 at American University in Washington, welcome to "The Kojo Nnamdi Show," connecting your neighborhood with the world. Later in the broadcast, the barefoot running boom and what's behind it. But first, a week ago, we were hearing warnings about financial Armageddon. Two days ago, crisis was averted and the debt deal was signed. So why are investors acting like default is still at hand? Well, to quote a famous comic book character, "We have met the enemy and he is us." Investors are reacting to the big picture, namely that all indicators are pointing to a fundamentally weak global economy.
MR. KOJO NNAMDI
That's making them skittish. And market watchers say we could be in for jitters on Wall Street well past Labor Day. So what does this rollercoaster ride mean for your money? What's still a safe bet and where is the good news in all this volatility? Well, joining us in studio to explore this is Jeff Kosnett. He is senior editor at Kiplinger's Personal Finance magazine and senior editor at Kiplinger.com. Jeff, thank you very much for joining us. Good to see you again.
MR. JEFF KOSNETT
Good to see you, too.
The markets closed slightly up yesterday after a wild ride. But that was after eight days of consecutive declines and here we thought a debt deal would take the markets out of their swoon. What gives?
Well, the debt deal was only one of many things that's going on in the world. And honestly, it was a little bit, I think, disingenuous to think that just settling the debt crisis would create some big rally in stocks because the market didn't really go down very much leading up to that point, even though there were all the headlines about, as you call it, financial Armageddon and default. The truth of the matter is that most serious investors did not really think the U.S. would default on its debt and it hasn't.
800-433-8850 is our number. If you have an investing question for Jeff Kosnett from Kiplinger's, give us a call, 800-433-8850 or go to our website, kojoshow.org and ask your question there. Jeff, the economic reports we are getting seem to be all gloom and doom. Yesterday, we heard that the pace of job growth in the services sector was down. Early in the week, we heard the same about the manufacturing sector. Given these and other indicators, might we be looking at a new recession?
Well, you're going in that direction. Now, to get to an actual new recession still requires the economy actually to shrink. Right now, people who were forecasting that the economy perhaps would be growing at 2.5 or 3 percent, which is not great, but it's not a recession. We're not ratcheting that down to less, to one, two. So, you know, if you figure that that feeds upon itself, you can't rule that out and that is reflected on what's going on in the stock market.
Can we consider this downturn a market correction?
Yes, we can. The textbook definition of a correction is a decline of about 10 percent. Now you have different markets. You have the Dow and you have S&P and you have the NASDAQ. You have the foreign markets, which are also going down about the same pace. So one thing about market corrections is they do seem to have a habit of arising in August, September, October. If this wasn't going to happen this week, I think that you'd certainly had every expectation that it would have happened sometime by, say, mid-September.
We're talking about markets and investing in the wake of the debt deal with Jeff Kosnett. He is senior editor at Kiplinger's Personal Finance magazine and at Kiplinger.com. And taking your calls at 800-433-8850. Have you been adjusting your portfolio since the debt ceiling crisis emerged and how and what have you done? 800-433-8850. Jeff, the papers today are filled with anxious reports about the debt crisis in Europe. We've just barely avoided default in the U.S. But how do we prepare if the crisis in Europe isn't contained?
Well, that's going to continue to weigh not only in the financial markets, but on the condition of the world economy. Unfortunately, as we learned two or three years ago during the subprime mortgage crisis and some of the other credit events, banks and investors and securities firms and governments all have a big stake in one another. And if a really major country like, say, Italy or Spain really needed help, not just sort of having a recession, but needed to be, frankly, to be bailed out, the losses would reverberate through banks and through other, you know, big pools of money.
And I'm not sure that there's a whole lot that you can do about that. So the Europeans are being very responsible in trying to deal with this situation. But, you know, things sometimes get out of control so I can understand why that would make people nervous.
On the brighter side, there's no time like the present to buy a house. Is that correct?
That's correct, if you can get a mortgage. There was a report today in the Wall Street Journal that large pools of money, like hedge funds and whatnot, are trying to get together to buy a whole lot of single family houses, fix them up and rent them out. Housing prices are very low, but there's no real reason to expect them to start soaring again unless you're buying in a place where, say, foreign buyers or, you know, pretty well-to-do investors are also interested in living.
So there's a big difference between buying a house, say, in the Washington, D.C. area where the economy is still the strongest in the country by far or going out to, say, Indiana or Ohio and buying a house and expecting to make much money off of it.
We had a caller, Oscar, who couldn't stay on the line who wants to know about the gold price. Is it a safe investment or has it reached its maximum?
Gold is a silly thing and it's at a silly price. We didn't like gold about $500 ago and we don't like it now. We understand that it is sort of the voting booth of choice for people who feel either that the financial world is coming to an end or that they don't have anything else to do with their money. But if you have money that you just absolutely can't afford to lose, buying a commodity that has gone up 40 or 50 percent in the last year seems to me to be a pretty risky maneuver at this time.
What kind of financial headlines are we going to need to see before the markets perk up again?
Better news on jobs, better news on the gross domestic product, some more sense about what's going to happen now with the budget and the debt ceiling and so forth. It will be very interesting, I think, to most Americans, not only investors, but everybody, to see which members of Congress on both sides of the aisle are going to be appointed to this group of 12 and whether or not it looks like it will be people who can work together, say, like the Gang of Six, the people who were on the Simpson-Bowles Committee or if it will be the hardliners on both sides who will say, you know, my way or the highway, nothing much will get done.
I think the financial markets were very patient during this argument up about the debt ceiling in July. As I said, the market really didn't panic over this. But if it looks like the step two of this process is going to be totally stalemated, I think the stock market will not like that. But it won't only be the stock market, it will be all the rest of the market. So we have a big stake in what they work out here in the next six months.
So you're saying that people who are investing in the stock market and all the markets are going to be looking closely at the individual six-members of Congress from each side of the aisle who make it to the super committee that's going to be responsible for making the cuts that have to be voted up and down. And that who is on that committee can influence those markets?
I believe so. The markets are very attentive to U.S. politics, much more than they are to politics in any other part of the world. It doesn't really seem to matter what goes on in China or Russia or even Europe with elections and with congressional statements and with the premier of Russia the other day saying that the United States is a parasite on the world.
But, you know, whether or not it looks like the United States can govern itself, which came under some stress there for a while, this is pretty important. So I think there will be a reaction if it looks as though that committee is going to be one that works well or one that doesn't work well.
Here is Steve in Bethesda, Md. Steve, you're on the air. Go ahead, please.
Yeah, my question is do you think there's a possibility of going beyond this ideology? Right now, you have republicans who say any taxation is equivalent to original sin. Well, you can't do anything practical if you continue that way. In fact, the Bush tax cuts, if all of them were eliminated, we'd be back to where the rates in the '90s and we basically deal with the deficit problems. So why can't people realize that calling tax as original sin is just idiocy?
Well, I'm not a political commentator, but I would say that I think any honest solution to the deficit problem would have to involve, whether it would be higher taxes or just the abolition of certain tax breaks deductions and so forth. And that's part of what I'm getting at. If it looks as though Congress is not going to face up to what it needs to do on both sides of the line, the financial markets will throw up their hands and say the United States just is incapable of dealing with its problems.
That it is hopelessly deadlocked into two factions. And the stock market -- and not just the stock market, but the rest of the economy will not like that. Businesses will not hire people. They will not invest. They will not take risks. And that's not good for investors.
Steve, thank you for your call. How do we keep our retirement accounts and investment safe from all this uncertainty? We got an e-mail from Barb in Damascus. "I'm less than a decade away from retirement. And given all the uncertainty, I want to preserve the retirement money that I currently have saved up. I recently rebalanced my accounts and sold off a lot of my stock-based funds, reinvesting them in bond funds. Now I hear that if the U.S. credit rating is downgraded, it will hit the bond market. Is that true? And if so, should I get the heck out of bonds?"
No. And it depends on what kind of bonds you have. Many investors, especially individuals, have found it worthwhile to invest in diversified bond portfolios, either through mutual funds or by buying select bonds individually from a broker. Give a good example, the bonds of Walmart, which is rated AA. So far this year, they have gained about 12 percent in value, plus there was a yield if the bond was, I think, due in 20 years or at about 6 percent.
Walmart stock has gone down about the same as math as the bonds have gone up. Many mutual funds offer you the opportunity to buy international bonds, which have been a very strong performer both in terms of the currency appreciation and the yield. So all bonds are not the same. Treasury bonds, at this rate that they're paying not, frankly, are not a good deal for individuals. At 2.6 percent or whatever it is for a 10-year bond, that really isn't very much.
The point of Treasury bonds in the world is it's a safe haven as a place where countries and governments and banks and insurance companies park their money. They're really not designed for you and me. So I would keep the bonds. I would not get out of stocks entirely. You did a very wise thing by rebalancing. And rebalance in a few weeks or a few months.
What kinds of opportunities do volatile markets like this create for investors, Jeff?
Well, for professionals who think they can trade their way through any crisis, they like this. They like the idea that stocks now look cheap, that they're 10 percent down from where they were two weeks ago. To you and me, however, that generally is scary because you can't see the bottom.
So what kind of conversation should I be having with the person in charge of my retirement portfolio right now?
One thing you should be knowing is how much money you really need to retire and how close or how far you are from it. And that makes allowances for the further contributions that you'll be able to make, say, in the next 10 years. And if you are way, way below where you need to be and many people are in -- through no fault of their own, you have to keep investing because otherwise you may as well just, you know, give up.
But if you have enough money to retire on now and you made some of it back from the previous market and the, you know, serious problems we had in 2007 and 2008, far be it for me to say, you know, just be stubborn. I mean, if you'd take your money out of the market and put it in the bank, you will get no return, but you also have no risks. So you can balance that by making those calculations.
Jeff Kosnett is senior editor at Kipplinger's Personal Finance Magazine and senior editor at Kipplinger.com. Jeff Kosnett, thank you so much for joining us.
You're quite welcome.
We're going to take a short break. When we come back, we will talk about the barefoot running boom and what's behind it. I'm Kojo Nnamdi.
Transcripts of WAMU programs are available for personal use. Transcripts are provided "As Is" without warranties of any kind, either express or implied. WAMU does not warrant that the transcript is error-free. For all WAMU programs, the broadcast audio should be considered the authoritative version. Transcripts are owned by WAMU 88.5 FM American University Radio and are protected by laws in both the United States and international law. You may not sell or modify transcripts or reproduce, display, distribute, or otherwise use the transcript, in whole or in part, in any way for any public or commercial purpose without the express written permission of WAMU. All requests for uses beyond personal and noncommercial use should be referred to (202) 885-1200.