About six weeks ago, even those of us who are barely paying attention started to hear ominous reports out of China. The stock markets in the world's second largest economy had taken a turn for the worse and were shedding value to an alarming degree – 7% one day, 8% another, to the tune of a whopping 35% by the time Black Tuesday rolled around. This occurred despite continual action on the part of the Chinese government since May to shore them back up or at least stop the bleeding. Market turbulence had set in and the central banks of that country seemed powerless to stop it. Watching all this from half a world away, the big question on everyone's mind became: when is this going to hit us? On August 21, 2015, it did. The Dow plunged over 500 points that Friday and another 500+ the following Monday. The race was on. How low can it go?
In China, the cause of market problems seems to have been rampant speculation, often on borrowed money, leading to a bubble that was ripe for pricking. As the Chinese markets relentlessly fell, their Central bankers did what any central bankers would do in that situation – they intervened, cutting rates, introducing trading limits, devaluing the yuan, and even banning negative remarks by pundits. It didn't help. Chinese markets kept dropping and by the time August rolled around, world markets were dropping with them.
Here in the US, our own central bankers have not been idle. As the great unraveling stretched into a third day, Federal Reserve vice chair Fischer suggested that a September rate hike (the great bugaboo of this latest financial crisis) was perhaps not as likely. Markets rallied briefly, then dropped again, on news out of Jackson Hole, where the big wigs of the Fed happened to be meeting that week, that a rate hike was still on the table for this month. Meanwhile, non-mainstream commentators joked about the Plunge Protection Team engineering early morning rallies only to see them fizzle later in the day (Plunge Protection Teams of the world, unite! read one headline).
As of this writing, US and other world markets are still “volatile,” despite bullish pronouncements from Morgan Stanley and others that imply that the bottom has been reached. We can only hope so, as the various indices have dropped precipitously since their latest high on July 20. The S&P is down 207 points since that date (9.7%), the Dow 1998 points (11%) and the Nasdaq 535 points (10%). This is what they call correction territory, and it happened fast.
If it was just Wall Street traders and big money players who are affected by this volatility, it wouldn't seem like such a big deal. We could watch placidly from the sidelines while the billionaires and their minions battle it out. But since the 1980s, the US stock market has not been the province of the high rollers alone. Regular Americans, including most current and future retirees, have been in there too, watching the values of their portfolios dropping by the day. Dependence on equities, usually in the form of mutual funds, has been exacerbated by Fed policies that have kept interest rates at near zero for almost seven years. When the average 60 month CD earns less than 2.5%, many smaller investors see equities as the only way to grow their portfolios.
And that's when this all starts to seem kind of cruel. The government and the banking industry have all but forced people into the game, despite the fact that the cards are hopelessly stacked against them. How can a mutual fund investor make money when computer algorithms and sophisticated players are controlling most of the trading? For the last year, many mutual funds have barely broken even, and now this... What options remain for the little guy?
There was a time when most retirees and savers alike kept their money in long term savings certificates, and although the return could be modest, at least they saw some growth in their savings. Now, many mutual fund investors in “safe” plans are lucky if their holdings even retain their value. Compounding their misery, the advice of money managers as late as last week was “Ride it out,” based on the assumption that what goes down must eventually come back up. The question is, how long is eventually?
Gambling with your retirement savings seems like a bad bet, unless you have the stomach (and the time, depending on your age) to wait out a protracted downturn. My guess is that most of the smart retiree money is already parked in money markets, waiting it out. Alas for the rest of the herd who are now stuck waiting for their portfolios to recover, however long that takes. They are, as one pundit described them, the proverbial “bag-holders.”
In a global economy, rife with market manipulation, state-sponsored currency wars, and other forms of financial skullduggery, the stock markets are no place for sober-minded investors who just want to have comfortable (i.e, not impoverished) golden years. As for the central bankers' response, it appears that we're now in a tight corner as raising rates is likely to strengthen the already mighty US dollar causing further pain in emerging and emerged economies around the world (thus increasing the risk of knock on negative effects here), while leaving rates at zero only continues the small investors' dependence on equities with all their attendant risk.
The US economy may be strong, as many inside and out of the government insist, but in the globalized economy of today, there may be no way to insulate small investors from world economic trends. Therein lies the rub, and it's a conundrum that could leave small investors with no place to turn.