Some days you eat the bear ... some days the bear eats you
By Don Kuehn
On July 1, the Dow Jones Industrial Average traded in "bear market" territory for the first time in this nearly yearlong decline. If you are not familiar with the term, it's called a bear market when an index like the Dow trades 20 percent or more below its high levels.
Writing this column is much easier when the markets are buzzing forward and new high marks are being set regularly than it is when the markets are down, gas prices are staggering our economy, food and consumer prices are way up, and the housing market is threatening many families with foreclosure and bankruptcy.
On the other hand, maybe there is no more important time to focus on your money than times like these.
There's no question that the current economy is bad. Almost every sector has experienced some calamity in recent months, with gas prices dominating the news all summer.
If you are in your '20s or '30s, or if your long-term memory isn't what it used to be, you may not remember the 1980-82 recession. By comparison, today's problems don't seem so bad: Inflation is about 4.2 percent, whereas in March 1980 it peaked at 14.76 percent; unemployment hit 5.5 percent in May and June of this year, but in November 1982 it was 10.8 percent; and gross domestic product (GDP), which went up by 1 percent in the first quarter of this year, declined 2.86 percent in the third quarter of 1982. Back then homebuyers were paying an unbelievable 18.6 percent for a 30-year mortgage-three times what we're paying today.
Back in the "good old days" when we threw a recession, we really threw a recession!
But the economy bottomed out, and after the 1980-82 period we began a long, steady climb out of recession into the greatest period of prosperity the world has ever seen. Not uninterrupted, mind you (there were big drops in 1987 and 2000 for instance), but a steady uptrend nonetheless. We went from a stock market low of 759 in 1980 to a peak of 14,164 in October 2007. Amazing.
None of that probably makes you feel better about today. In the last year, we have gone through the subprime housing fiasco, the meteoric rise in energy, food and consumer goods; inflation and one bad economic story after another. Oh, did I mention the war?
The Conference Board's Consumer Confidence Index tracks the measure of consumers' attitudes toward the economy. In June, it fell to 50.4 (1985 = 100) -down from 58.1 in May.
Lynn Franco, director of the Conference Board Consumer Research Center said, "This month's [June] Consumer Confidence Index is the fifth lowest reading ever. Consumers' assessment of present-day conditions continues to grow more negative and suggests the economy remains stuck in low gear.
"Looking ahead, consumers' economic outlook is so bleak that the Expectations Index has reached a new all-time low. Perhaps the silver lining to this otherwise dismal report is that consumer confidence may be nearing a bottom," Franco added.
Negative news leaves you feeling poorer even if your salary seems secure and you are (hopefully) starting this new teaching year with a raise, a step increment or both. And when you feel poorer, you tend to cut back. You rein in spending, cancel vacations, delay home improvements, put off buying new stuff and save wherever you can. In little ways, these cutbacks add to the malaise in the economy because nearly two-thirds of GDP activity is attributable to consumer spending.
Enter the government's economic stimulus package that kicked in over the summer. Those $300 to $600 checks Uncle Sam sent out were intended to goose the consumer. Uncle wanted you to spend like it was 2007 again.
So, if the bear has been nibbling at you, what do you do now?
First, maintain perspective. The economy goes through cycles, and the current downturn won't last forever. At some point, there will be capitulation in the markets when all the panic sellers and handwringers have sold and prices get so low that bargain hunters flood in. The resulting demand for stocks will drive the markets higher (at least that's how it's supposed to happen).
Here's a little history about bear markets since 1960: In 1973-74 we experienced the Ursa Major of markets with declines of 45.1 percent, but the average bear decline is about 31.1 percent. The average duration of modern-day bears is 14 months, but the longest ran from January 2000 to October 2002. Over the 12 months following a bear market, the average recovery was 31.8 percent and the range of 12-month recoveries was between 8.7 percent and 51.4 percent, according to Ned Davis Research.
As for energy, that's another story. Some observers believe the current record gas prices can be blamed on speculators tweaking the supply/demand equation. Some think Big Oil and OPEC are taking advantage of the war and global political uncertainty to boost prices at the wellhead. Some experts cite the weak dollar and declining inventories, as well as the emergence of consumer-based economies in former Third World nations, as the reasons for what we're seeing at the pump.
There's really not much an individual can do about the price of filling the gas tank. You can cluster trips to the store and car pool or take public transportation where it's available and hope prices settle back to historic levels soon. Don't count on it.
The positive side to high energy prices might be that Americans are retooling their driving and energy-consumption patterns thereby becoming more efficient, diversified and environmentally friendly. If that's true, there could be a long range good to come out of this mess.
If you haven't spent that stimulus/rebate check yet, consider using it for a long-term goal. Invest it in a broadly based stock index fund now, while prices are low, and in 20 years or so it could be worth 10 times what it is now.
And that raise your union negotiated for you this year, or your step adjustment? Direct it into a 403(b) account through your employer's payroll department. If you never see it, you'll never miss it; over the length of your career, if properly invested (and I'm not talking about an annuity here) in one of those broad market index funds, you could have a meaningful supplement to your retirement benefits.
If you are an investor with a little cash on hand, the bear market may offer a once-in-a-decade chance to buy good company stocks or mutual funds at fire sale prices. Remember, the idea is to buy low and sell high. You may not see prices at this level again in your lifetime.
You have to be in the market to benefit from any future run-up. If you want to "eat the bear," buy while the markets are at these relatively low levels. It's your money—put it to work for you.
Don Kuehn is a retired AFT senior national representative. For specific advice relative to your personal situation, consult competent legal, tax or financial counsel. Comments and questions can be sent to firstname.lastname@example.org .