The drastic market fluctuations up and down recently, have multiple causes, local and national impacts, and possible solutions, all of which can be difficult for the layman to understand.
Two local financial professionals, investor Ralph Hasenpflug, and Charles Ault, C.F.P, provide the local perspective and reflect on the issues at play.
According to the Wall Street Journal website (www.wsj.com), the stock market has undergone roller coaster volatility during the past two and a half weeks. The news is not all bad; despite large daily changes in the value of the markets, overall the market has regained some losses during that time period.
Nov. 21 saw a nearly 495 point gain, after a week of heavy losses. That week saw several days of 400 point plus losses, and five percent declines in the overall market value per day in some cases. The following holiday week was kinder, with steady gains. Severe volatility returned this week with almost a 695-point loss on Dec. 1, and a 270 point jump Dec. 2.
At the same time, economic indicators such as new home sales, consumer spending, and durable goods sales are declining, while unemployment is on the rise. Gross Domestic Product (GDP), the United States total economic output, is shrinking. National news outlets interpret these factors to indicate the economy is in a recession, and tougher times lay ahead.
The current administration is trying to target these problems with legislation including a stimulus package, which sent people tax rebate checks to try and invigorate the economy in May.
Recently corporate bailouts went to companies in the banking industry to quell losses in the housing industry. Now CEOs from the big three automakers just completed a trip to Washington D.C. to ask for their own bailout package. President-elect Barack Obama is hastily appointing his economic team, and readying his strategy for its January debut.
Ralph Hasenpflug, of Bristol, has been an investor for more than 25 years. He feels the current banking crisis has its roots in legislation dating back more than 30 years.
He explained the Community Investment Act of 1977, passed under the Carter administration. It was intended to give banks the opportunity to make some riskier loans, but it remained dormant until the late 1990s, he said.
At that time banks began to pressure Congress to deregulate the banking industry to allow them to package investments and sell them to one another, according to Hasenpflug. President Clinton approved the deregulation, with a clause that would loosen requirements to allow more consumers access to mortgages, he said.
This forced the banks to offer loans to borrowers that would not have been approved previously, and take on more risk, said Hasenpflug. After deregulation, mortgage banks began packaging mortgages together and selling them as investments to other banks.
The housing crisis caused those investments to drop in value as nearly 20 percent of the underlying mortgages went into default, with the mortgage banks stuck paying their investors eight percent returns, according to Hasenpflug.
“When the housing market crashes, even people with good mortgages see the value of their house decline below the value they borrowed to purchase the home,” he said. “Then the mortgage is underwater, the amount owed is higher than the home is worth. That’s bad, it sucks a lot of money out of the markets.”
He attributes the problems to a perfect storm of Congress with a political agenda, the greed of banks and consumers wanting everything new and now. He said he feels the problem is snowballing.
“When things go too well, sometimes things get out of hand,” Hasenpflug said. “If it were just me, I’d say ‘no one gets a penny.’ It would be rough, but after two, three or even five years, everything would be clean. It would be really hard for a lot of people for a long time, but it’s the sound, reasonable thing to do.”
The bailout could work short term, as long as sufficient money was infused into the economy, and the Community Investment Act is repealed, he said. That solution does not address the issue that Americans are living beyond their means, and until that problem is fixed, the government will have to provide bailout after bailout, according to Hasenpflug.
“Everyone needs to tone it down and live with what is in their pockets today,” he said. “We have to get back to sound practices, by boards of directors, car companies, local businesses and consumers.”
As an investor, Hasenpflug is nonplussed by the current market volatility. “It’s just the markets going up and down, I’m not selling or buying,” he said. “I do the opposite of the majority, and am very successful. The day-to-day strategy is more important, only spend what you have.”
Charles Ault, C.F.P., feels the market has shown the effects of the recession for a long time, he said. The problems accumulated over time, with rising home and car sales and stable fuel prices, buckling once volatility struck fuel prices this summer, according to Ault.
Ault described consumers tightening their spending in response to rising fuel prices, and the impending winter. High gas prices led to reductions in SUV sales spread to other industries, and airfares increased, exacerbating the problem, said Ault.
“The consumer needs to have more money. We can spend our way out of this recession,” he said. “Anything will help the consumer as long as it increases their disposable income and lending power, and decreases housing and transportation costs.”
Ault reported a drastic reduction in mortgage interest rates this week, as low as he’s seen them in his 25 years in the business, he said. This could give consumers the opportunity to refinance, and secure a lower payment to reduce pressure on their cash flow.
Bailout money for the automakers could help more people secure auto loans, allow automakers to offer their cars for a better price, and/or offer more efficient cars, according to Ault. It could be another factor to help the economy out of this slump.
“Consumer spending cannot go unchecked forever,” said Ault. “We need to be able to afford big ticket items, good or bad. We have to live within our means.”
According to Ault, normally Mainers are a little more insulated from national economic downturns because of reductions in manufacturing and increasing dependence on tourism income. This could make the state’s economy more susceptible to this down cycle in the economy, because travel has declined across the country this fall, he said.