Mike Pendleton CFP® with Edward Jones said his “phone is ringing off the hook” these days. He called it a “culmination of different events.” It has not only concerned clients calling him about their investments but 75 percent of his calls are coming from clients looking for buying opportunities.
“With some courage and patience you can make some good returns,” said Pendleton.
Pendleton and other people from other firms were confident that the debt ceiling would be raised by the August 2 deadline. He said, “because they waited until the last minute and because the S&P downgraded our credit and the euro situation with Greece, Italy and possibly Spain coupled with weak economic reports … all that added up to massive fear and a sell-off.” He called it a “shoot first and ask questions later” reaction.
He predicted continued volatility and market swings until things calmed down. That could be weeks or many months.
As the August 2 debt ceiling approached the eleventh hour last week Wall Street became restless. Republicans tied raising the U.S. debt ceiling to budget cut mandates. The market indices briefly came up for air Friday after eight consecutive down days losing a total of 700 points on the Dow.
The cable TV pundits and talking heads were blaming congress, the President and the Tea Party. The small investor watched helplessly as 401Ks were slashed. Wall Street didn’t like the $1.5 trillion deal brokered between the Democrats and the Republicans at the last minute.
Wall Street doesn’t like uncertainty. Kicking the can down the road to the “super committee” just added another layer of fear on top of weak economic data. Twelve committee members evenly divided between Democrats and Republicans will be charged with coming up with at least another additional $2 trillion of cuts, revenue or tax reform measures.
As the political spectacle played out in the media Americans and Wall Street asked what would be different with a “super committee.”
Standard and Poors rating agency took notice and downgraded the United States debt from AAA to AA+. The U.S. has held the AAA rating for 250 years. S&P criticized the dysfunction in American politics saying it was the deciding factor. They held little hope that a super committee would come up with the $4 trillion of cuts and/or revenue that the agency expected.
It will take at least two years before S&P will consider boosting the U.S. back to a AAA rating. Moody’s and Fitch are holding off on a downgrade for now. They are keeping the U.S. on “negative watch” until congress votes on the super committee’s proposal on or before January 15, 2012.
It will take 7 of the 12 committee members to come to a consensus by Thanksgiving. There is a “trigger” if they fail. The trigger would cut half from domestic programs, and half from defense.
Medicaid, Social Security, Medicare benefits, food stamps and the Earned Income Tax Credit would be spared from the trigger. Pundits were attacking S&P and saying it wouldn’t hurt anything but our pride.
Tensions were high as the Asian markets opened Sunday night. It wasn’t pretty. Dow futures were tanking. It was a perfect storm. On Monday the Dow plunged 634 points the sixth worst point decline in 112 years and the worse drop since the financial crisis in December 2008.
The next day the Dow lost 200 and rose to 429 points in the span of an hour. The Federal Reserve held interest rates at .25% or basically zero. There will be no quantitative easing for now. Pendleton thought “they have a [QE3] plan drafted in the wings but may not pull it out for months if need be.”
“[The Federal Reserve] is getting low on their book of tricks. Interest rates can’t go below zero and there is only so much stimulus they can throw into the economy,” he said. Consumer confidence and spending and policy decisions from the government must be the stimulus.
The interest rate will sit at .25% at least until mid-2013. “This was something the Federal Reserve normally doesn’t do,” said Pendleton. This will keep borrowing rates and CD rates low explained Pendleton. “Their intention is to keep money cheap so people will continue to buy cars and houses and add to their business,” he said.
The Federal Reserve doesn’t have a stellar reputation when it comes to predictions. They predicted growth at 3.4% to 3.9%. The economy only grew at 1.3% in the second quarter of 2011.
Job growth remains enimic and July’s New Orders Index registered 49.2 percent, indicating contraction for the first time since June of 2009.
“Corporations are hoarding cash because they don’t know what the local landscape is going to look like – they don’t know if there is going to be another recession – a double-dip,” said Pendleton.
The good news is corporations are increasing dividends on their stock with their cash. Pendleton said instead of getting one percent interest on CDs that investors consider dividend-paying stocks like Coca-Cola, McDonalds, Walmart, AT&T, Verizon and other utilities.
An analyst with a sense of humor: “People used to talk about Alcohol and tobacco being recession-proof investments,” he said. “When times are good people go out drinking and partying – when times are bad they stay home drinking,” said Pendleton with a chuckle.
To top it all off the European Union (EU) is struggling to prop up the debt of several of its 27 countries. Besides Greece, Spain and Portugal now there is Italy, the euro zone’s third-biggest economy. We are a global economy and “the concern there is more import and export related,” said Pendleton. “If the European zone falls back into recession they may not be buying as many goods and services from America and could slow down our economic growth,” he said. He compared the Japanese tsunami and the supply disruptions that had in the U.S. “No one country stands on it’s own,” he said.
S&P has also threatened further downgrades. Moody’s and Fitch could follow and interest rates on credit cards, mortgages and autos would rise.
Pendleton said, “there is always going to be political actions that will effect the stock market.” He asked, “think about it can you ever remember a time there wasn’t some sort of significant political debate going on … there will always be change … something new to worry about and something new to talk about.”
Pendleton explained that coming out of a recession has always been bumpy. Since WWII there has been only one double-dip recession and that was in 1980. He said, “there is no way to guarantee that we are not going to double-dip on this one.”
Posted By Valerie Garner