After a summer of ups and downs, the markets headed downward as September drew to a close. By Sept. 25, the decline had affected oil prices as well as the silver and gold markets – which were down 26 percent and 9.6 percent, respectively. The bond market yielded no joy either, with yields on 10-year U.S. Treasury Notes falling below 2 percent. Global markets are giving investors a worrisome time, and domestic economic and European debt problem concerns have combined to produce a murky forecast. Here are the major issues under discussion and some viewpoints from various investment experts.
What is the Fed doing?
The Fed’s latest approach to spurring the economy (announced on Sept. 22) was met with initial negativity and a brisk sell-off of U.S. stocks. The Fed’s unconventional strategy – coined Operation Twist – involves selling $400 billion worth of short-term bonds and using the proceeds of this sale to buy longer-term Treasury Bonds. This move is designed to lower long-term interest rates and increase short-term rates, with the end goal of encouraging people to borrow and invest. A further aim is to lower mortgage rates to encourage people to buy or refinance homes. This type of maneuver was used back in the 1960s (when the twist was a popular dance) to twist the yield curve. Investment advisers are still on the fence regarding Operation Twist. There is no consensus as to whether the strategy worked the last time it was used, and some investment experts don’t believe that home purchases will be boosted significantly by lower interest rates.
How do the problems of Greece affect the United States?
We live at a time when global events shape the respective economies of both developed and developing nations worldwide. It is feared that Greece might default on its debt, which is currently estimated at twice the value of its annual production. Although it is a relatively small country, it shares the euro with other European nations. What happens in Greece might reverberate through other euro nations, and nervous investors could steer clear of countries like Portugal, Italy, Spain and Ireland that also hold large debts. The large European banks hold most of this debt, which in turn could create pressure on these major financial institutions. If Europe experiences a banking or economic crisis, it could pressure other global financial entities and further weaken the U.S. economy. The good news is that European governments are intensifying their efforts to formulate a plan to address the concerns of the financial markets and forestall this negative scenario. Under pressure from world leaders – including the United States – a group that represents 20 nations has just announced it will present “a collective and bold action plan.”
Is there a silver lining anywhere?
Yes. Some investment advisers are adding income-producing alternatives to stocks and bonds to client portfolios. Others are counseling investors to watch stock prices of companies they would like to hold and to buy quality stocks on the dip. U.S stocks are at affordable price levels. To clients who are willing to ride the current market out for a couple of years, some advisers recommend acquiring blue chips with a history of raising dividends. On the plus side, oil prices are lower, mortgage rates are going down and home buyers can find some great bargains.
Investment advice should be tailored for the specific investor. The comments above are intended as general commentary and should not replace professional counsel from your tax and investment advisers.