Susan Tompor Detroit Free Press
Published 4:39 PM EDT Aug 14, 2019
Wall Street is back to its old tricks and scaring everyone with a 401(k) with some ugly triple-digit declines.
The Dow Jones industrial average closed at 25,479.42 Wednesday, down 800.49 points or 3.05% i.
At one point on Wednesday, the Dow had fallen by more than 700 points on concerns that an obscure economic signal is flashing red for a recession. Here are answers to some questions, to avoid sheer panic:
QUESTION: What should someone with a 401(K) do at this point?
ANSWSER: Hard to keep saying over and over again that you should sit tight, but most analysts say if you’ve got time on your side, you should wait it out.
“If your time horizon is five years or longer, the current 6% sell off, and even a potential 10% (decline) should not compel you to be a seller,” said David Sowerby, managing director and portfolio manager for Cleveland-based Ancora Advisors.
Even if you’re nearing retirement, you don’t want to panic. Don’t forget you are likely to spend 20 or more years of your life in retirement, Sowerby said.
At the same time, though, you can expect more volatility ahead and you’ll have to learn to deal with the ups — and downs — on the Dow.
The market can test logic — and your patience — in the near term.
A market correction is part of the game. For 75 years, Sowerby noted, the U.S. stock market has averaged a correction or downturn of 10% or higher about once a year.
Currently, the major stock indexes are down 6% to 7 % from July 26 highs on concerns about trade, tariffs and an economic slowdown.
Q: Why is something called the ‘yield curve’ making headlines?
A: Wall Street has been watching an economic indicator known as the yield curve for more than a year.
The reason: It’s one hot recession warning sign.
In general, rates for 10-year U.S. Treasury notes should exceed short-term rates, such as the two-year note, if you’re expecting the economy to remain strong.
Think about it, you want to be paid more money for the risk of lending money for 10 years than you’d want to be paid for a shorter-term loan.
The yield curve inverts when short-term rates turn higher than long term rates, as they did during trading in the bond market Wednesday. The last time we saw this happen was in June 2007 — and that was a sign of the next recession. The Great Recession ran from December 2007 through June 2009.
Now, the question becomes is this a sign of long term anxiety — or a shorter-term blip.
Every recession has been preceded by an inversion in the yield curve. But at the same time, not every inversion in the yield curve has led to a recession, said Sam Stovall, chief investment strategist for U.S. equities at CFRA Research in New York.
A year ago, economists predicted that many investors would become very alarmed if the yield curve inverts. And that prediction proved to be correct.
Q: So are we falling into a recession here?
A: Economists say no. Nothing is guaranteed, of course, but many say the economy is showing some healthy signs here, including decent housing starts and consumer confidence levels. Unemployment is low. People are buying and selling houses.
“We don’t think we’re headed into a recession right away,” Stovall said.
Plenty of worries remain — such as the U.S./China trade war and its fallout.
Pressure is building on the Federal Reserve to cut rates at the next meeting in September, which would be the second rate cut in 2019.
More: Dow plummets 700 points as recession worries intensify, bond market raises red flag
More: Trump’s threat to raise tariffs could bring bumpy ride for stocks, 401(k)
Some say a recession may be increasingly likely in the next several months, perhaps sometime later in 2020 on concerns about President Donald Trump’s trade policy. But others are even less pessimistic.
Robert Bilkie, CEO of Sigma Investment Counselors in Northville, said that while the shape of the yield curve is a reasonable predictor of future economic activity, it’s not an infallible indicator.
“Due to the low unemployment rate and the shortage of workers in the United States, I would put the odds of a recession at less than 25%,” Bilkie said.
“Companies are loathe to lose good employees and as a result, are unlikely to initiate layoffs, a factor that has defined past downturns — creating a self-fulfilling prophecy.”
Contact Susan Tompor at 313-222-8876 or [email protected] Follow her on Twitter @tompor. Read more on business and sign up for our business newsletter.
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