GRAND RAPIDS — Let’s not kid ourselves; nobody knows what’s next. Not the brokers. Not the economists. Not even the TV news anchors.
When the markets reopened last week, both the Dow and Nasdaq took dramatic tumbles on Monday. Both stabilized on Tuesday. Then the Dow plummeted, recovered, but fell again on Wednesday.
Prior to the reopenings, the Federal Reserve cut the prime lending rate from 3.5 to 3.0 percent. At the same time, the Securities and Exchange Commission relaxed some rules that made stock purchases easier.
But neither move carried much weight with investors last week.
So how will the markets perform over the next six months? That depends on what the economy does between now and March. The two are inevitably tied together and are largely dependent on whether the answers to two questions are yes. Will consumers continue to spend? And will businesses begin to borrow to buy capital goods?
“Those are the two unknowns. Both are complicated by the fact that we have an obvious emotional problem, which has been such a tremendous shock that we don’t know how long it will take to wear off,” said Eric Ericksen, a local independent money manager. “Even without that shock, the question was, were consumers running out of credit? In other words, could consumers keep spending until businesses caught up?
“We don’t know,” he added. “Is this a good time to buy stocks? The answer is, we don’t know. And nobody does.”
Not even Federal Reserve Chairman Alan Greenspan knows. The reserve board trumped its earlier seven quarter-point drops with a half-pointer to keep the economy from crumbling under the strain of a retreating manufacturing sector and the stress of terrorist attacks. The Fed’s action wasn’t primarily directed at investors, but was intended to inspire confidence in lenders.
“What you don’t want to have at a time like this is lenders cutting off good credit. You could have a situation like we had in the 1920s when the Federal Reserve tightened things. Then banks wouldn’t lend money to anyone and the whole economy grinded to a halt,” said Ericksen.
“The Fed’s move is making it easier for banks to loan money. That’s very good for the economy because it at least helps to stabilize it and avoid a meltdown.”
But businesses haven’t borrowed to invest in capital goods and expansions, and Ericksen said he doesn’t see companies rushing out any time soon for loan applications.
“I think they’re going to wait. Because no matter how cheap money is, and keep in mind that in Japan the interest rate is zero, the only time you borrow money if you’re a business is when you can see demand. And that’s where we’ve been for the last six months,” he said.
If consumers spend, then demand will rise, and businesses will borrow to invest to meet that rising demand. But recent layoffs have scared consumers into thinking that they may lose their jobs soon, and have cut back on their spending. Now businesses and consumers are in a stare-down, each waiting for the other to act.
“The fact that the Federal Reserve makes money available is the foundation, but it’s not the trigger.”
So what should investors do? That depends on how old they are. Ericksen said if you’re 30 or 40 you can keep buying because you’ve got 10 years to readjust. But if you’re nearing retirement, then you not only have to worry about the next five to 10 years, but also about the next six months.
“That’s nothing new. I’ve always preached that. When you’re close to retirement and have accumulated enough, you have to be defensive in good markets and bad ones.”
Ericksen added that he wouldn’t be surprised to see a few more days like last week Monday pop up between now and next spring.
“We just don’t know how these things will unfold. That’s obvious. Because if we knew, we wouldn’t have been in the market at all,” he said. “You have to accept the uncertainty. I guess that is a key point.”