Q&A: Have a question about the swings in the stock market?

Feb 06, 2018

The Post's Heather Long is answering your questions about Monday's record single-day 1,175-point drop in the Dow Jones industrial average and the swings so far today.

Be sure to read Heather's overview of the "panic attack" yesterday and why investors were selling off.

What does this mean for your personal investments? Is this sell-off having any impact on your investment plans? Write in with a question below.

People have a lot of questions about this market sell-off. I'll be answering as many as I can in the next hour. Feel free to ping me with more at: heather.long@washpost.com 

 

Is it possible that having an unstable authoritarian POTUS unchecked by a now demonstrably supine Congress is also spooking the markets?

Political risk is ALWAYS a factor in the U.S. and around the world. So yes, it plays a role, but it's hard to pin this latest sell-off on politics alone. Did investors really wake up on Friday, Feb. 2nd and suddenly think President Trump and Congress were a big problem? I think that's a hard case to make.

What you can argue is that investors are looking at the situation in Washington and are concerned that Congress still hasn't passed a budget and that the government continues to spend more and more money (we learned last week the U.S. Treasury is on track to borrow over $1 trillion this fiscal year). Those concerns are mentioned on the trading room floor, but they aren't the No. 1 driver of what's happening right now. 

 

To what extent do you believe that the large national debt we hold, together with the large federal deficits that increase the rate at which that debt expands, is a consideration in our seeming inability to return interest rates on more traditional forms of saving to reasonable levels?  It is one thing when a small country like Greece gets caught in such pincers, but the US is big enough that the market may well adjust to the governmental situation rather than forcing the government to adjust to the market situation.  Thoughts?

Concerns about the debt/deficit are definitely playing a role.

The latest market sell-off began last week when the bond market freaked out and yields hit their highest levels in 4 years (which then triggered the stock decline). It's no coincidence that we also learned last week that the U.S. Treasury was going to start issuing more debt since America is on track to borrow nearly $1 trillion this year, up 84 percent from the year before. This put pressure on yields, helping cause them to rise.

The U.S. is nowhere near the situation in Greece is in. Our debt that's held by the public is around $15 trillion. Yes, that's large, but it's "only" around 75% of our economy (our GDP). Greece is over 180% debt to GDP. 

At the moment, there's still a lot of demand for U.S. debt. It's still seen as a very safe asset. BUT it will test the market to issue this much debt in a relatively good economic period. Typically, the U.S. only issues this amount of debt in recessionary periods. There's a high likelihood bond yields keep rising. And, as we saw on Friday, that's causing some concern in equity markets as well. 

 

I wondered what per cent of our stock market is owned by foreign investors? Is there any concern that they can manipulate our market to create a adverse drop?

This is a good question. I've seen estimates ranging from 20% to about 35%. The Tax Policy Center, a Washington DC think tank, said foreigners own 35% of US stocks (http://www.taxpolicycenter.org/taxvox/foreign-investors-win-big-tax-free)  

While it's possible there could be some manipulation, I think that's unlikely. It's not like ALL foreigners are in unison on what to do. And remember: A sell-off hurts those investors too, so there's a lot of reason for foreign investors to also want the market to go up (and stay up!)

The prognosis is wage going up.  This causes inflation, increasing rate to barrow, hence cut corporate profit.  But didn’t Corp just got massive rate cut from taxes?  How does this new economy equate? 

Good question.

First off: The U.S. economy looks very healthy right now. The U.S. is growing at about 2.5% a year (and many expect even better in 2018). Inflation is low (the latest read was 1.7%, which is below the 2% target) and hiring is strong (unemployment is at a 17-year low meaning about everyone who wants a job can get something). On top of that, many companies are reporting record profits and they are benefiting from the recent tax cuts. 

So overall, it feels like we should be happy right now about what's going on. But investors on Wall Street are forward looking. They are thinking about what's happening 10 to 18 months down the road. And what they are seeing is that the economy may be TOO GOOD. (Sounds weird, right?) But they are worried about OVERHEATING in the economy. 

Basically, if the economy gets too hot, the Federal Reserve will have to raise interest rates quickly (almost like a parent giving a time out at a party). That tends to hurt stocks. So the market, which many feel was "priced to perfection," suddenly rebalanced a bit to take some steam off and price in the risks of some overheating later this year or next. It doesn't mean it's definitely happening, but Wall Street felt there was some risk.

How can new federal chairman balance new economy?

Good q. In the midst of all this market mayhem, the most powerful position in the U.S. economy changed hands!!!

Janet L. Yellen, the great Fed leader for the past 4 years had her last day on Friday. And Jerome Powell, a lawyer and Trump's pick to lead the Fed now, took over on Saturday. Powell has a good reputation as a bipartisan consensus builder in Washington DC, but he's still the "new guy." Wall Street embraced his nomination because he's seen as a Yellen protoge, but there's still some concern about what he'll do next. Will he raise interest rates a lot this year, which the market doesn't like? Or will he still go slow and steady, like Yellen?

Personally, I think the market overreacted a bit to Powell. But he does have a hard job ahead... the economy is picking up. He and his new team have to figure out whether it's picking up too much, which is a very difficult decision. For now, he's wise to stay silent and let these market jitters play out.

Do you think this sell off has anything to do with tax cuts? 

The fairest answer to this question is probably: "A little."

The tax cuts are a $1.5 trillion stimulus to the US economy. Any time you pump this much money into the economy, you would expect it to heat up. The problem is the economy was already improving. We normally do stimulus only when the economy is tanking in an effort to prop it back up. But Trump decided to do a major stimulus during good economic times. The risk is that the economy overheats (and what goes up a lot tend to go down at some point...)

Still, the underlying economy looks very good. So some of this sell-off is just the fact that the stock market had raced up a lot because of the giddiness over the tax cuts, etc.

What are the other options? Real estate? CDs?, Gold?, Silver?, Trump Towers?, Oil Wells?

Great question. 

So the obvious disclaimer applies: You should talk to your investment adviser. 

But your point is well taken. Many experts argue that bonds are about to decline in value (as yields go up, bond prices go down). So the usual advice for scared investors of selling stocks and buying bonds is hard to stomach right now when we could be entering a bearish period for bonds. 

Real estate in many parts of the country also looks quiet pricey right now. And oil prices have rebounded to about $65 a barrel, leaving some wondering how much higher it will go, at least in the short term.

Gold and silver and other "real assets" are always good hedges, but most investment experts will tell you not to put any more than 3 to 5% in these types of assets. 

In times like this, I always go back to basics:

Stocks are still your best long-term investment. 

But you want to have a "balanced" portfolio that makes sense for your age and your needs (i.e. do you need the money in the next year? the next 5 years? the next 25 years?) 

If you are under 60 and don't need to money until retirement, you are probably best off just sticking with what you've got. If you are retired and may need some money in the next year or two, you probably want to think about realizing some gains and moving to a less volatile investment. 

 

A 1,000 point drop looks bad. How bad is it really?

We saw a ton of headlines proclaiming that Monday was the WORST DOW DROP EVER. That sounds bad. But let's look at this in context.

It was the worst point drop ever. 

You need to look at all investment gains and losses in PERCENTAGE terms. In reality, Monday's losses were "only" 4.6%. That doesn't even rank in the top 100 worst percentage losses of the Dow. 

See the difference? The point drop looks bad (and is why all the news outlets lead with that) but the percentage drop, while large, wasn't anywhere near the worst days. 

Keep that in mind... 

Should I sit tight and stay invested if I'm 66 years old?

This is probably the hardest question I'm going to get today.

Young people should definitely sit tight. But people who are near retirement age or already retired have a tough decision to make... 

How quickly do you need the money? Do you have other savings on hand you can draw from first? 

Honestly, I'm not a financial adviser, but the most common advice I hear from experts is that people in their late 60s and older are taking a bit of money off the table, as they say. They are putting a bit more into bonds or other "save haven" assets. 

But also keep in mind that the average life expectancy in the US is now almost 80 years old. If you are going to live another 12+ years (and hopefully longer than that!!!) then you probably don't want to ditch all of your stocks. Those are still the best asset building tool most "regular folk" like you and me have.

When there is a 1,175 pt drop, does the value simply vanish? Or does it mean that approx. $1 trillion in stock was converted into cash by firms and individual investors? Given how the stock market is near record highs, would bonds or securities be more financially sound in light of a potential cryptocurrency bubble?

Lots of good q's here. Let me try to unpack it a bit.

1. What happens to the ~$1 trillion? Basically, it vanishes. That "value" was only on paper. Until you actually cash out of the market, you only have gains on paper (or, really, in a computer now). It's not real. Sure, some people may have cashed out, but mostly the market just fell and those paper gains disappeared.

2. Should I invest in bonds or stocks or ? This is a tricky one. Yes, stocks are near record highs and look pretty pricky. So you have to wonder how much more they'll rise. BUT bond prices are also very high right now (yields are near record lows), so many experts argue bonds don't look that attractive right now either.

I'm not an investment adviser, but I can tell you I am stick to the basics: Develop a long-term plan for your investments. The classic one is 60% stocks, 40% bonds, but most younger people (myself included) have a lot closer to 90% in stocks. That's because stocks average about 8% a year returns historically versus only about 4% a year for bonds. So you want to keep a good bit of money in stocks to build your long-term wealth. 

But if you're retired or close to retirement, you might want to be more cautious and keep more in bonds. That's the general rule of thumb. 

When will the Federal reserve discuss inflation?

INFLATION seems to be the ugly word driving a lot of this investment angst lately. For years, America has had TOO LOW inflation (in fact, inflation is only about 1.7% right now, below the 2% target). So it's kind of funny everyone is freaking out about too much inflation suddenly.

Part of the reason there was a shift last week on Wall Street to start worrying about inflation is because the Federal Reserve DID discuss it. In the Fed's statement last Wednesday, the Fed predicted inflation would hit 2% this year. Now, the Fed has been predicting that for the past several years and it's been a "boy who cried wolf" scenario. But Wall Street is taking the prediction more seriously now since the economy is picking up b/c of tax cuts and a global rebound and wages are finally showing some signs of rising.

Bottom line: the Fed IS talking about inflation. Expect a lot more talk about it in the coming months.

I am fearful that the real problem with markets is the debt ceiling.  I expect Trump to default on the national debt.  Then what happens?  Does the entire world economy collapse?

You are right to be concerned. The debt ceiling is a real problem. It prevents the US from borrowing any more money to pay the bills that the US has ALREADY SPENT MONEY ON. 

If the debt ceiling isn't raised in March, the US could very likely run out of money to pay its bills. That's a scary scenario that has never happened before. That means people (including Social Security recipients) might not get their money, and it also means people who own US bonds might not get paid their interest. 

In a worst case scenario, people around the world would lose faith in America's ability to pay its debts. That means it would be a lot harder for the US to borrow money in the future. And yes, it could cause global markets to sell-off.

This is a legit concern, BUT Congress has always raised the debt ceiling. Democrats and Republicans understand what's at stake here. I expect they'll get the job done again in early March, if not sooner.

Why would Wall Street be worried about higher wages when that only allows consumers to spend more and the profits still drives corporate earnings higher?

Higher wages are a good thing! We've been waiting for higher wages in the United States for years. In fact, wages are only growing at 2.9% a year. That's higher than the 2.5% we saw for the past few years, but it's still far below the historic norms of 3.5% to 4%. 

So we should all be cheering for more wage growth. And you are right that means people can buy more (or save or invest more).

Wall Street is worried about this though because a) more money going to workers means lower profits and b) it's a sign of inflation. 

 

Why is a booming stock market important to the economy?

The stock market is NOT the US economy. 

Ever since the Great Recession, stocks have (mostly) been rising, while wages have (mostly) been stagnate. The reason is that many businesses were growing profits by cutting costs. That was great for investors, but not so great for Main Street.

Now we are seeing a bit of a reversal. Wages are starting to rise (a little). Wall Street doesn't love that because it means less money for investors/profits. 

So this is a case where even though the "real economy" is doing well, the Wall Street economy might not do as well. That's not the end of the world.

 

I’m old enough to remember multiple corrections, downswings, and periods of turbulence in the stock market. I was the beneficiary of my first employer starting our 401(k) after Black Monday in 1987 so we bought low. I was the victim of tech stocks in the 90s. But throughout it all, the time-tested theory of “buy and hold” worked for me, and it’ll work now. Just don’t panic and sell off your holdings. I know people who did that after 9/11, convinced that the market would never recover, and they deeply regret their reckless decisions.

You said it very well. There's a reason "buy and hold" is the best investment advice of all... 

Did we just take on $1.5 T in debt that has to be repaid to give the wealthiest people in the country a tax cut, and just watch their tax cut evaporate as the market tanked? How will this debt be paid back, and did we just take on real debt without real benefits to anyone, including the super rich this was supposed to help?

That's an interesting way to look at the sell-off. On the one hand, you can definitely argue that the latest sell-off has whipped out all the gains since the GOP tax cut bill passed in December.

But keep in mind that the stock market is not the real economy. The government still has to pay for the $1.5 trillion tax cut and corporate profits are still going to go up and many Americans (~80%) are still going to save some money on their taxes. None of that changes because of where the stock market is.

 

Now what?

I am sorry to hear that. If you rolled over yesterday, then yes, it was bad timing. 

But bigger picture, stocks were up 26% in the past year before the sell-off. That's about 3x the normal market climb of 8% a year, on average. 

So yes, we are all focused on how much we lost on Friday and Monday, but we are quick to forget just how much we gained in the past year. On net, we are still up for the past 12 months. It's just now we are up closer to a normal amount.

Going forward, I think you should ask yourself: When do you need that retirement money? If it's not for 10+ years, then you probably do want to stay in stocks. If you need the money sooner, then you may want to rethink your asset allocation. 

What are the factors that determine the size and length of a correction. Can any of those be applied to this correction to determine the bottom, including time?

The Washington Post is actually working on an analysis along these lines, so stay tuned!

For now, I'll just say that there are some patterns in corrections, but if they all followed the same playbook, then everyone would know how to handle them and make money. Unfortunately, that doesn't happen!

 

The key question to ask is: Have the fundamentals really changed? Yes, most people argue the market was overvalued in January and needed to take off some steam. But has anything fundamentally changed in the economy or in corporate balance sheets? That's how you know if this is just going to be a short-lived correction or the start of a longer bear market.

All throughout January I kept seeing financial advice articles discussing the need to move investments from US bonds into Developing Market funds because of the potential for US financial instability. Given the recent drop in the Dow is this still sound advice?

The sound advice is: Diversify, diversify, diversify. That protects you every day.

But you make a valid point: Bonds have been on a massive bull market run for years. Now we appear to be seeing the early signs of a shift. 

This is why it's a tricky time for investors. Normally, when stocks fall, you shift into bonds. But right now, many think it's not a great time to be moving into bonds.

Personally, I'm sticking with my long-term investment plan that I developed with my financial adviser. It's the best "hedge" going forward. I also am keeping a bit more in cash on hand, but I haven't done anything extreme like selling a bunch of stocks.

Is now a good time to consider diversifying a portfolio.

Good q. In short, having a diversified portfolio is important, no matter what the market is doing. 

The best thing to do is talk to a financial adviser (or use an online/app product like Betterment or Wealthfront) and get a long-term game plan that will allow you to sleep easily, whether the market is going up or down.

Thanks for all the great questions. I'm sorry we didn't get to them all. Washington Post readers are always so thoughtful. 

We are continuing to report out about the market dip and answer your q's. See this great story from my colleague Thomas Heath today "here's what you need to know":

https://www.washingtonpost.com/news/get-there/wp/2018/02/06/the-stock-market-is-going-bonkers-heres-what-investors-should-know/?utm_term=.a63711cded3e

Feel free to email me more Q's: heather.long@washpost.com

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Heather Long
Heather Long is an economics correspondent. Prior to joining Wonkblog, she was a senior economics reporter at CNN and a columnist and deputy editor at The Patriot-News in Harrisburg, Pennsylvania.
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