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? Many of America’s largest companies, such as McDonald’s Corp. and The Coca-Cola Co., derive a significant portion of their earnings from Europe. As Europe slows down, it affects 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. With America in an economic slowdown and Europe clearly in recession, China’s exports have dropped, affecting 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. Many corporations had been waiting anxiously to see how the Supreme Court’s ruling on the constitutionality of parts of the health-care reform law would affect them.
Meanwhile, the global economic slowdown puts pressure on our economy, on job creation and on our stock market. Even the Federal Reserve, America’s central bank, 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?
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. Investors should play it safe, and ignore the daily headlines. Stick to your long-term plan of regular, diversified investing for your retirement.
The interest-rate markets are the most manipulated of all; the Fed has promised to keep pushing rates down. But when you, as a saver, 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.