This article first appeared in the St. Louis Beacon, Aug. 7, 2011 - When the debt debate was grinding on in Washington, and everyone was saying a resolution was needed to calm fears in the markets, investors weren't exactly overjoyed, but they didn't panic.
But just two days after the deal was done, stocks went into freefall, with the Dow having its worst day on Thursday since 2008, wiping out all of its gains for the year. Friday, the markets gyrated wildly, rising on a better-than-expected jobs report, then plunging again, then rebounding to end up in positive territory.
Then, after the markets closed, Standard & Poor's downgraded U.S. debt for the first time in history, setting the stage for more dramatic movement on worldwide markets.
So what happened to start the roller coaster on its wild ride? Why now? And what's next?
Market watchers interviewed by the Beacon had answers that boiled down to this:
- The debt deal may be done, but everyone is waiting to see how it's put into practice.
- The end of the debt negotiations let investors focus on other parts of the economic picture, particularly frustratingly slow growth at home and a mounting debt crisis overseas.
- The constant drumbeat of economic news tends to frighten investors who would be better off to block out the noise and let a well-balanced approach do its work over the long term.
"As we look forward," said Craig Fehr, senior equity analyst at Edward Jones, "we think the economy will continue to grow in a positive fashion, but also we think in a very sluggish fashion. Part of that is how deep the great recession was. We don't see a snapback in the economy to average growth.
"Both in the U.S. and globally, the economy is still trying to work through the issues that came as part of the great recession, such as government debt issues. All that serves to be a near-term distraction for investors and adds volatility to the market, but the good news is that the longer-term outlook is for growth."
Fehr added that investors may have a kind of amnesia when it comes to remembering typical cycles in the market. He noted that a correction in stock prices -- typically defined as a drop of 10 percent -- generally comes once a year, and smaller dips, of 5 percent, come three times a year.
"So what we're seeing in the marketplace right now might be a bit unsettling," he said, "but it's not all that uncommon. Investors can look for opportunities within the corrections to add quality investments."
Michael Tsiaklides of Tealbrook Financial in University City said investors shouldn't take the violent ups and downs too much to heart.
"Do not panic," he said when asked what advice he had for those worried about the volatility. "We have the bears and the bulls fighting all the time, but an investor having a well-diversified portfolio shouldn't be panicking when the markets panic."
Just because the United States finally hammered out an agreement to end its debt crisis, at least temporarily, is not a sign that the rest of the world will be able to ease similar fears. Tsiaklides recounted the problems in countries from Ireland to Spain to Greece and now to Italy.
"The debt crisis was an excuse," he said. "People thought an agreement on the debt ceiling here would solve our problems with unemployment and with debt. However, that was just an agreement. Implementing that agreement is another thing. The markets reacted differently from how some people thought they would react.
"The European situation is much more complicated. You have 27 countries that are members of the same union, but it's not a federal system. You have a central bank, but it cannot impose a rule or an interest rate on each state, like the Federal Reserve can here."
Tsiaklides said the wild stock market swings are likely to continue, given how stubborn the problem has become and how ineffective some of the actions to solve them have proved to be.
"The government and the Fed have used all their tools, I think," Tsiaklides said. "Debt reduction by itself will not solve the problem. We need growth."
Keith Womer, dean of the school of business administration at the University of Missouri-St. Louis, said that part of the rise in stock prices over the spring and early summer may be laid to an "element of irrational exuberance."
Now, he added, the realization is setting in among investors that government may not have the policies to use to help nudge the economy along.
"Maybe people in the market understand the economy better than most of the people in Congress," he said. "One thing I think is pretty clear is that the Republicans, and many of the Democrats, have decided to swear off fiscal policy to help us out of our unemployment problem. And that comes at a time when the Federal Reserve is essentially out of things it can do.
"One thing that can be done is that we can have real fiscal stimulus. I saw a study that looked at the net impact of federal spending and state spending across the recession, and roughly the result was that increase in federal spending canceled out mostly the decrease in state spending, so the net stimulus on the economy was almost nil. I think that's been pretty much the case."
Womer doesn't see a double-dip recession on the horizon, but he doesn't expect strong growth either.
"We've had some low growth," he said, "and I think we'll continue to have low growth. I think what the stock market is seeing is that growth is not going to be as robust as perhaps had been hoped over the spring, and so it gave back all of its gains this calendar year."
Rick Hill, of the Hill Investment Group in Clayton, said that while long-term investors are waiting for that growth to materialize, they will do themselves a favor by not watching the markets 24 hours a day.
"It's a futile exercise to try to figure out why things change," he said. "I always advise people to ignore the market, take the long view and have a good plan. You have to say, who cares if the market is down in 2011? By the time I need the money, it will be back up.
"Most people want to watch the news, read the paper, worry about what's going on in Congress and figure out what they should do. They should step away from it. To be a good investor, you have to avoid daily fluctuations. There is always uncertainty in equities. You have to accept that volatility."
He notes that every investor who sells stock, someone else is out there buying it.
"You have to look at both sides of the trade," Hill said. "Warren Buffett is the kind of guy who loves this volatility. He can take a calm look at things."
Fehr noted what some have called a vicious cycle: Consumers aren't spending because they're worried about their jobs, so companies don't hire because there isn't demand for their products. Because companies aren't hiring, people worry about their jobs, and so forth.
"It can be a vicious cycle. We also think it can be a virtuous one, and that's the key to investing in markets like this."
At times, governments have been able to step in and supply the financial stimulus to get the economy going again, but at a time when deficit cutting is the order of the day, that route seems unlikely. Still, Fehr said, with corporate profits being one of the few bright spots in the recent economic news, the momentum will swing upward again, eventually. He does not see the economy dipping into recession again, as some fear.
"Profits have been quite strong," he said, "and with those profits, companies can reinvest, and some of that reinvestment is hiring more people. As companies hire more people and more people have jobs, there's more spending, and more demand."
Both Hill and Fehr pointed to the increase in stock price starting in 2009 that no one expected so soon after the financial crisis hit the year before. Taking advantage of that perspective, and using to help grasp the fact that sometimes no one can tell what the market will do or why, can yield valuable insights.
"Ignore the things you can't control," Hill said. "Feel good when markets go up, but don't take any credit for it."