Tuesday was a day when it was easy to watch the minute-by-minute swings on Wall Street markets and wonder whether it’s time to panic.
The day saw a quick succession of events.
While the U.S. stock markets were closed Monday for Martin Luther King Jr. Day, overseas markets fell sharply. That led the Federal Reserve to hold an emergency meeting Tuesday morning and cut the federal funds rate, a key interest rate, by three-fourths of a point. It was the biggest one-time cut for that rate since 1990.
Investors saw the surprise move as worrisome, sending the Dow Jones Industrial Average diving more than 450 points in early trading. It closed down 128 points during a see-saw trading day.
All this at a time when the nation seems poised for a recession.
So, is it time to starting hiding money in mattresses instead of investing?
Not for most people, according to economists and financial planners surveyed by The Herald.
If, of course, you’re a year away from retirement and most of your life’s savings are tied up exclusively in stocks, you’re in trouble.
For others, this is some of what ongoing financial events mean:
Younger workers, recent home buyers
For young workers hoping to buy a home or for relatively new homeowners, Tuesday’s rate cut is mixed news. The cut in the federal funds rate usually lowers the variable rates on home equity loans.
On the other hand, the cut doesn’t mean mortgage rates are automatically headed lower, said Greg Rielly, a mortgage planner at Mortgage Advisory Group in Everett.
“Historically, mortgage rates most often will move in the opposite direction of the federal funds rate,” he said.
Still, with mortgage rates sliding the past six months to levels well below 6 percent for a 30-year fixed-rate mortgage, now is a good time to take out a mortgage or refinance from an adjustable rate to a fixed one.
“The rates are extremely low right now,” Rielly said.
Car loans likely will become more attractive with the Federal Reserve’s rate cut. Also, the percentage rate on variable-rate credit cards likely will go down.
For younger workers who aren’t making a lot of money, now is not the time to leave your job. Protecting your paycheck may be the smartest move you can make.
Mid-career workers
For the average person with at least some working years left, a 401(k) plan through work and maybe an Individual Retirement Account on the side, Tuesday’s gyrations in the stock markets don’t mean much.
“I think very few people should panic. For the average Joe and Jill on the street, they shouldn’t pay too much attention to what’s happening in the stock market,” said Bill Conerly, a Northwest economist and owner of Conerly Consulting.
Gary Ball, a member of the board of the National Association of Investors Corp., a national organization for investment clubs, said those invested big into the stock market should be doing it for the long term.
“I believe no one should have any money in the stock market if they’re going to need it during the next five years. If you don’t need it for 10 years, it all should be in stock market. If a person has been saving money (in the market) for college for a son or a daughter and he needs it next year, I’d pray for the stock market to go back up,” said Ball, and a former investment relations official for Everett’s Fluke Corp.
Alec Williamson, a certified financial planner in the Lynnwood office of StanCorp Investment Advisers, said a disastrous day on Wall Street reminds investors why it’s smart to have diversified investments.
“If you’re in your accumulating years, this is what you want, because it makes it easier to buy into the stock market,” he said.
People nearing retirement
First of all, it’s not time to sell, said Ball, who’s already retired.
“I certainly don’t want to be selling (stocks) at wholesale prices. It’s a good time to be putting money in the stock market. The stock market is the only place that when it goes on sale nobody wants to buy. It just went on sale,” he said.
But it’s also a good time to shift money into other, lower-risk investments as well, said Scott Smallman, senior vice president of investments with Wedbush Morgan Securities in Seattle.
Retired investors
For people who are in their retirement years, a big drop in the stock market can be scary if you’re not diversified in your investments.
Williamson said he advises his clients to have a year’s worth of living costs available in cash, and the equivalent of five years’ expenses invested in fixed investment products, such as certificates of deposit.
In the meantime, Ball said, it makes sense for people of any age to shore up their household finances in case recession or other bumpy times are ahead.
“My thoughts are I think people ought to get themselves out of debt. I’ve been helping friends of mine who are trying to retire, and they have way too much debt,” he said. “Personally, I think you ought to have your mortgage paid off when you retire. If you owe a lot on credit, you lose a lot of flexibility.”
An ‘unnerving’ time
Conerly said he holds out little hope that any economic stimulus plan passed by Congress will have a dramatic effect on the economy, but he added that the Puget Sound region probably won’t be affected as much by a slowdown as other regions. That’s because this area still has a strong job market, lots of business momentum for the Boeing Co. and other large employers and a real estate market that’s fared better than most.
Even if the stock market isn’t done with the see-saw cycle of the past three weeks, the most important thing is not to suddenly and dramatically shift your investment strategy. Even when events seem to point toward panicking.
“It was a little unnerving, that first half-hour of the market today,” Williamson admitted Tuesday.
Smallman said he took 31 calls from clients by about 1 p.m., a much higher number than usual.
“Even the most even-keeled people are feeling a little edgy about this,” he said. “I know I am.”
Reporter Eric Fetters: 425-339-3453 or fetters@heraldnet.com.
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