When Congress and the White House reached an agreement on the debt ceiling increase last weekend, many market watchers believed that such would bring an end to volatility and that we would see the resumption of some level of calm in the bond and stock markets. In the past few days, we have seen everything but that calm return to the markets, culminating in the Dow dropping more than 500 points yesterday. While the Dow’s drop represented a loss of over 4%, the yield on the 10-year Treasury dropped almost 6% yesterday, to close the day at 2.42 percent – the lowest yield of the year on the 10-year.
The yield on the one-month Treasury bill fell to almost nothing – 0.008% – showing that investors were willing to accept almost no return in exchange for holding investments they believed to be stable. As we have discussed before, bond yields fall when demand for bonds increase.
The Dow’s drop on Thursday was the steepest point drop since December 1, 2008 – right in the midst of the financial crisis involving the banking industry. With the sell-off yesterday, the Dow basically gave up all gain for the year and actually put the Dow into what investors call a “correction” – a drop of 10% or more from its highs. In the past two weeks, the Dow has lost more than 1,300 points, or about 10.5%, amounting to a dollar value loss estimated at $1.9 trillion in market value.
Besides the facts regarding the market’s downturn, the bigger question is WHY?? Many financial analysts are now predicting that we are entering, or have already entered, another recession. While technically we are not in a recession since the nation’s Gross Domestic Product (GDP) is still positive, many analysts believe that growth of our nation’s economy has slowed to the point that recession is inevitable.
Growth in the economy generally produces jobs. In April, more than 217,000 new jobs were created and the unemployment rate was at 9%. However, in May only 25,000 jobs were added and the unemployment rate inched up to 9.1%. June was even worse with only 18,000 new jobs being added and unemployment increasing to 9.2%. It is estimated that our economy needs to create a minimum of 255,000 jobs per month to begin to make any dent whatsoever in the unemployment rate – and of that number, at least 125,000 new jobs are needed each month just to keep up with population growth. According to unofficial projections, the “under-employment” rate – the rate that takes into consideration those that are unemployed plus those that have taken jobs for which they are overqualified just so they have income – has increased to over 16.2%.
This morning the U.S. Department of Labor released numbers that show in July 117,000 jobs were added and the unemployment rate slipped to 9.1% – a better report than expected but still not as good as needed.
Needless to say, it looks like we may be in for a continued period of slow growth in the coming months – and maybe even in the coming years. As investors preparing for retirement, there is no better time than now to evaluate your strategy and your investment philosophy. During this time of market fluctuation, are you taking too much risk in your investments based upon your age and the number of years until retirement? Because you are younger, should you increase your investment risks now to take advantage of some of the displacement in the markets?
Regardless of your station in life, this is not a time to put your investment portfolio on auto-pilot. Even if you are comfortable with your investment strategy and allocations today, that is not to say that next week you might not need to re-think your decision. There is too much volatility in the marketplace to sit back and just hope for the best.