TOPICS > Economy

Investors’ Hopes for Turnaround Dim as Markets Plummet

February 20, 2009 at 6:10 PM EST
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As fears over the economic crisis continue to erode investors' confidence, markets at home and abroad are feeling the effects. Financial analysts discuss how the markets relate to the realities of the economic turmoil.
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JEFFREY BROWN: Once upon a time, and not so very long ago, the Dow Jones industrial average was almost double what it is today, and millions of Americans lived in a far more financially secure world than they do now.

What kind of impact is that dramatic drop having? We take a look from four different perspectives.

Jim Ellis watches the broad economy as assistant managing editor of BusinessWeek. Jane Bryant Quinn writes on personal finance as a best-selling author and columnist for Newsweek and Bloomberg.com. Mark Funkhouser is the mayor of Kansas City, Mo. A Democrat, he previously served 18 years as that city’s auditor. And Dan Ariely studies market and investor behavior as professor of economics at the Fuqua School of Business at Duke University.

Jim Ellis, I’ll start with you. Even just a few weeks ago, it seemed that the markets had calmed a bit, even gone up a bit. What can you tell us about what’s driving them down again now?

JIM ELLIS, BusinessWeek magazine: I think that there’s been a general re-pricing in what people think will be the future value of earnings. And that supposedly is what stock prices are. I mean, investors are saying, “This is what I think companies will earn and they’ll pay out in stocks, in dividends going forward.”

But that’s not the case now, because people are understanding that the economy is in much worse shape than we originally thought, that not only is the U.S. economy in bad shape, but foreign countries are going through the same sort of recession scenario that we’re going through.

And that’s really important, because right now about 37 percent of all the earnings of U.S. companies come from overseas. They’re about six, eight months behind us in a recession, so even when we start coming out of this maybe later this year, the foreign markets that we so depend on to prop up our own economy aren’t going to be there.

So the market is saying, “This economy is going to be in trouble for a lot longer than we thought, and, therefore, we have to adjust stock prices down.”

Market trends frighten investors

Jane Bryant Quinn
Newsweek/Bloomberg.com
Bonds are something that always should have been part of an investor's portfolio, especially when you reach middle age. Over the past 10 years, bonds have done better than stocks, and that's one of the best-kept secrets on Wall Street.

JEFFREY BROWN: All right, so, Jane Bryant Quinn, with that kind of information coming out from the markets, what are you hearing from people, from average investors? What kind of impact does it have on their behavior?

JANE BRYANT QUINN, columnist, Newsweek: People are terrified, Jeff. They never expected the market to go down this far. They've had a lot of faith in stocks. And especially people in their 50s and 60s who are looking ahead to retirement, they simply don't know what to do.

And what you're seeing is people saying, well, obviously they have to work longer, because their retirement funds are being hurt. They're cutting spending. You're seeing a tremendous amount of people saying, "You know, I just can't do this. I've got to save some more money." Saving more money, the saving rate is going up.

And as far as investments are concerned, they're starting to rethink their big commitment to stocks. You're seeing people say, "You know, I took a whole lot more risk than I thought I was going to. I didn't mean to." And they're getting very interested in fixed-income investments, whether short-term or whether bonds.

And, you know, bonds are something that always should have been part of an investor's portfolio, especially when you reach middle age. Over the past 10 years, bonds have done better than stocks, and that's one of the best-kept secrets on Wall Street.

People always think they need stocks for growth, but we haven't had much growth there. And bonds have continued to do very well. So as you're looking at what kind of investments you should be making, you absolutely need to say, "When am I going to need the money? If I'm going to need the money within, you know, five, seven, eight years, that money should be in bonds. That should not be in stocks."

JEFFREY BROWN: So, Mayor Funkhouser, let me bring you in. Connect what's happening on Wall Street to your city. I mean, what kind of everyday impact on corporations, foundations, hospitals, universities looking at their endowments, for example?

MARK FUNKHOUSER, mayor, Kansas City, Missouri: Well, of course, you see a drop in the potential for giving. You see a drop in the amount that foundations are willing to commit to efforts. You know, we see a large drop in the pension fund portfolios. I mean, we're going to have to completely take another look at what have been very sound public pension systems for our firefighters and our police and so forth.

But, you know, the point that Jane Bryant Quinn just said about people are terrified, that's what I see the most. I mean, yesterday in a staff meeting, one of my staffers got a call that was obviously important. She took the call and left the room on her little cell phone, came back, looked stricken. We said, "What's wrong?" She said she had just learned her husband had lost his job.

That sort of thing is scaring the daylights out of people, and it's happening a lot. Everybody knows a dozen people who've been laid off.

JEFFREY BROWN: And staying with you, Mayor, so what do you say to her? What do you say to other constituents?

MARK FUNKHOUSER: Well, the first thing I say is that I'm sorry that's happened to you. I understand. That's really tough. Let's huddle together and see how we can help.

You know, you've got to make sure that people understand that they matter and that it's not just a number. You know, 8,000 layoffs at Sprint, well, those are 8,000 families severely impacted.

But the other thing is, it makes it all the more important for us in the municipal government to be a source of stability, to continue to deliver, you know, police, and fire, and pickup the trash, and take care of the public property. They need to see us doing our job day in and day out.

And we need to be -- we need to pull in our horns and sort of focus on the essentials so that we can keep doing that.

Trust in institutions eroded

Jim Ellis
BusinessWeek
What we've seen is the complete meltdown of the U.S. credit system, and now people understand that it's not just some abstract thing. It hits you on Main Street.

JEFFREY BROWN: So, Dan Ariely, you come at this from a different angle. I mean, what do you see in terms of the behavior of investors? Is it a psychological matter at this point? Or is it rational to pull back the way we're hearing?

DAN ARIELY, Duke University: Yes, so, you know, in my mind, the pricing level in the stock market is detached from reality. It was detached from reality a year ago. It wasn't about the assets of the company or the ratio of earnings; it was about people's beliefs about it. And the beliefs right now are really kind of hysterical, in terms of low value.

And I think what we have is, actually, a crisis in terms of trust. So think about it for yourself. Which banker would you trust? I mean, which one of those CEOs would you want to handle your money? You know, it's very, very hard. It's a very hard choice.

And on top of that, I think the government is at an all-time low for trust. We did a very simple study. We asked people simple questions like, is the sun yellow? Is a camel bigger than a dog? You know, things that people say, "Absolutely, yes, no problem." But when we told them these statements came from a politician, all of a sudden they said, "You know what? I'm not that sure. You know, maybe the sun has some spots with another light or maybe a camel when he's born is a little smaller then when a dog is big."

And there's inherently a mistrust the moment you say something comes from a politician. There's an inherent mistrust.

Now, if there's this mistrust in the bankers and in the politicians, the question is, where do you want your money to be? And it's clearly not in the market. So people are taking money out, they're kind of cuddling in, slowing everything down, bracing for impact and for bad time, and as a consequence nothing is happening in the markets.

JEFFREY BROWN: Well, you know, Jim Ellis, pick up on some of those things. I'm just -- we have a new president. He's pulled out many new things here, and he has said repeatedly that none of this is aimed at a particular day on Wall Street.

Is he -- is he right about that? And what is -- what do we learn from Wall Street and playing into some of the things Dan Ariely was just telling us about trust in our institutions?

JIM ELLIS: I think we've learned from the crisis now that maybe we've put a little too much trust in some of our institutions and that, instead, we have to look a little closer to home.

Unfortunately, all the things we're looking at that we can believe that are in front of us right now are bad things. People over the last month have gotten their 401(k) statements, which a lot of people are arguing now sound like 201(k) statements. They've really seen substantial differences in those values.

And what they've been able to say is that that means my retirement, my future has been compromised. They've also looked at the piggy bank that they've been depending on for the last few years, which is the house. You've been able to liquefy the asset in -- through home-equity loans, through borrowing. You can't do that anymore. Credit sort of dried up.

And, all of a sudden, they've seen real lifestyle changes that they don't like. I mean, Americans enjoy a very high-quality standard of living, but a lot of that has been built on credit. And what we've seen is the complete meltdown of the U.S. credit system, and now people understand that it's not just some abstract thing. It hits you on Main Street.

People changing lifestyles

Mayor Mark Funkhouser
Kansas City, Mo.
There's something in the American political process that I call the happy-talk imperative, where you're like driven to be a cheerleader and so forth. I'm criticized often for not being enough of a cheerleader.

JEFFREY BROWN: Well, Jane Bryant Quinn, Dan Ariely used a word a little earlier, "hysterical." And I wonder what you make of that word. How do people gauge their well-being? Is it against what they had a year ago? Is it against the people next door? Is it against some suddenly bleaker future?

JANE BRYANT QUINN: I think they gauge their well-being largely against what they had a year ago or what they had last year, what they had five years ago. They're looking at their own jobs, at their own futures, at the amount of money they have right now and what they can count on. And that is where the people are scared, and that's where, as the mayor said, you know, you can get a phone call and you can lose your job.

And so people, I think, are very rightly frightened about what is going to happen here. And this is why it's just so important to say, you need to be trying your best to right yourself, to save more money, to deal with your debt, to try to make some sensible decisions in a time like this where, you know, as Dan said, this is probably going to go on for quite a while longer than we thought.

Americans are finding out that in many ways they are poorer than they thought. That is a terrible adjustment to make. On the other hand, you know, people are making it. There are real lifestyle changes going on out there, and there are real adjustments to certain lower expectations, and that's a hard thing to do, but it is also a sensible thing to do, because if you're going to cut some spending and try to get rid of some debt and save some more money, that is absolutely the best thing you can do in this time, as well as whatever you can do to be the absolutely best person at work so that you're not the first person fired.

JEFFREY BROWN: Well, Mayor Funkhouser, I want to bring in something. We heard the president today talking to some of your fellow mayors focusing on accountability. Now, clearly, he has a kind of psychological impact there, too, speaking to what people are demanding, I guess, in terms of what government can do. Do you think he's right to focus on that?

MARK FUNKHOUSER: Oh, I think he is. Now, remember, you're talking to a guy who was a government auditor for 30 years. So I'm all for that sort of thing.

But a couple of things that I have heard that I think are really important. The lack of trust in institutions and so forth is something I've been concerned about, written about for a long time. There's something in the American political process that I call the happy-talk imperative, where you're like driven to be a cheerleader and so forth. I'm criticized often for not being enough of a cheerleader.

But what happens then is that, when that happy talk diverges enough from the reality, and the reality pokes its ugly head up, and people have that sort of discounted risk over and over, then suddenly they got a real rude awakening.

Creating a new banking system

Dan Ariely
Duke University
Let Citibank worry about its own deal, and let's start creating new banks with no bad balance sheets, with new regulations, and hopefully be able to create some trust in the banking system.

JEFFREY BROWN: Well, Dan Ariely, what do you think about that kind of -- the question of happy talk, accountability? There's some more sense now of the question of fairness, you know, as we start to take actions to help some people, not help others.

DAN ARIELY: You know, there's a lot of discussion about fairness and whether there will be negative incentives for people to basically start defaulting on their loans.

You know, we've given a lot of money to banks. We've had lots of bailouts in the past. The history teaches us that it doesn't look like people are taking these one example and learning something to do in the future.

The question, though, if we think about it is the real stress of trust, real loss of trust. What should we do? What should Obama do?

And I think that basically two things we should think about. The first one is that we have one banking system which has not been affected by all of these problems, which are the federal credit unions. Here is a particular, somewhat odd system of banks that have been untouched by all of these problems. And I think I would personally strengthen them. Here we have a good, functioning banking system.

And the second thing is to think about, how do we create new banking system? It will take us many years to trust back the bankers at, you know, whatever institutions you want to name. And in some sense it's, do we want to spend five years getting our trust back in these people who've just betrayed us in such a way?

I think it might be a losing battle, maybe a time to go on. Let Citibank worry about its own deal, and let's start creating new banks with no bad balance sheets, with new regulations, and hopefully be able to create some trust in the banking system.

JEFFREY BROWN: And, Jim Ellis, just to come back to you to close this out where you started, you're saying, though, that, from what you can tell from the markets right now, they seem to be thinking this is going on longer than we even thought a few weeks ago?

JIM ELLIS: Right. I mean, basically, the underpinnings of the market are still weak, and we're not going get any benefit from overseas. And now, because so many average people are so afraid to spend, we're not going to get any pumping up of the economy from a rush of consumers to bail us out.

That means months of pain and probably not a real turn in the economy until late in the year. And a lot of the unemployment is going to continue to grow until the beginning of 2010.

JEFFREY BROWN: All right, we'll leave it there. Jim Ellis, Jane Bryant Quinn, Mayor Mark Funkhouser, and Dan Ariely, thank you all.