So the Fed cuts rates a second time, but the market is worried it won’t be enough to forestall a recession, especially if the Fed doesn’t cut rates any further? Maybe, but I think Ben Bernanke is going to stay in front of the impact that housing and the credit markets may have on the economy. The Federal Reserve will cut rates further if needed in December or beyond. But what about consumer spending? If housing is as bad as it seems, that means a lot of us are tightening our belts even more this year. If consumer spending trends down, then corporate profits decrease, hence falling quarterly earnings and stock market valuations.
Where do you put your money in the meantime? If you’re a well-diversified long-term investor, you probably stay right where you are. Status quo for me. I don’t think I’d chase the consumer cyclical stocks, since consumer spending may yet have an impact. Financials are out of favor with exposure to subprime and credit issues, yet the valuations for many financials are incredibly low. If the Fed lowers interest rates enough, the banks will make money hand over fist. But what if you have money you’re worried about… money you need in less than 3 years? Then the stock market is no place to put it. Money market funds still offer attractive interest rates, especially for high-yield accounts like ING Direct, HSBC or CitiDirect. And if you’re shopping for a home, or a mortgage loan, rates are now close to 6-month lows. Pretty good market for buyers, but many potential buyers are waiting on the sidelines, or re-thinking the homeownership equation. Can you blame them? For many people renting makes sense. Especially for young and mobile professionals… we live in a mobile society, so why not rent while the market works itself out? More power to those that do, but honestly, if you’re in the market for a home to live in for many years, there are tremendous opportunities out there. I’m glad to be living in a home we plan to stay in for many, many years.
In so many ways, the “mortgage mess” and “housing crunch” are just noise for many Americans. Sure we all hope our home valuations increase over time, but sometimes it takes a good many years to see that return. That’s why many people consider a home the best long-term investment they will ever make- it’s like a forced savings account. In the absence of dedication or disciplined investing, we pay our mortgage each month and eventually have a lot of equity in our homes, with the home value growing over time as well. That’s pretty nice, but only partially true, because the long-term rate of return on real estate is only around 6%! If you really want to increase wealth over time, you need to have some of your money invested in the stock market to provide some core growth for your portfolio. Preferably via a tax-deferred account such as a 401(k) or IRA. You know what else is just noise? That 360 point drop in the Dow today. But sometimes it’s hard not to hear it. Now where’d I put that penny…
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