State College, PA - Centre County - Central Pennsylvania - Home of Penn State University

Expectations In 'The Great Recession'

by on July 25, 2010 7:00 AM

During the Depression in the 1930s, State College earned the moniker "Happy Valley." Penn State University shielded our town from much of the downturn, joblessness and economic disaster the rest of the country faced. The same could be said for the current recession -- the "Great Recession," as some are calling it. Things may be slower here, and we still do not feel the pain of a 25-percent drop in home values or an extremely high jobless rate.

Being a local business owner, I am involved with many other owners and business people here in State College through my business, TIPs (a networking group) and WiNGs (a women business owners' group). The overall sentiment is hopeful and cautious. The economy has not come back to full steam, and many companies plan on keeping the smaller work force and lower overhead. They have no plans to grow back to their levels from before the downturn that began in 2007. Many sole proprietors are not at the income levels previously obtained, even though they are working harder and smarter. However, most are comfortable and not concerned.

The area where I see the most concern is in portfolios and investments. This may be because it is my line of work (I am a registered investment adviser), but I have never seen this level of fear creep on so quickly. Investors are skittish and want protection from the downside as well as potential for upside. This is a difficult mix to create and sustain.

One thing I can guarantee clients looking for growth and protection from inflation is that I will have negative returns. This should surprise no one who has invested. The reality is that investing is about progress, not perfection. It is also important to pay attention to the environment and trends that emerge and to manage expectations. For instance, after the burst of the technology bubble, real estate investment trusts paid well and had great positive total returns for a while as the overall market lagged. It is vital to go where the returns are and the money is.

Saving is different from investing. Saving is socking money away in a money market or savings account for liquidity and short-term needs. Guaranteed savings and conservative bonds and money markets are earning rates below the long-term inflation rate. They are at their lowest rates possible due to the Fed keeping its rates at 0-.25 percent. Inflation over the past 50 years has averaged 4 percent annually. To maintain your buying power, you must match or beat inflation. To maintain what you can buy with $1 over the next 10 years, you need to have $1.48 to buy the same stuff down the road. Highly rated corporate bonds and FDIC-insured CDs are earning rates below the 4 percent. A five-year CD typically runs under 3 percent. With the Fed keeping interest rates at historical lows, saving is being penalized.

The big bonus to the situation is if you want to borrow and have good credit, rates on loans are incredibly low. A 30-year in State College is currently quoted at under 5 percent. If you are looking to buy a house, prices are down, and mortgage rates are the lowest they have been in decades. The interest rate environment is benefitting borrowers.

The fact remains that investors, meaning anyone with an IRA, 401k or mutual fund, remain fearful or on the sidelines. The bear market that began in 2007 had a burst of bull exuberance in March of 2009. Earnings were better, and the government had flooded the economy with liquidity and cash. The bailouts were in full swing, and unemployment benefits extended to help people through the worst economic downturn since the Great Depression. Now, the government's stimulus is slowly being pulled back, and the weakness in the private economy is showing.

We need to stand on our own two feet as consumers and businesses. However, with the debt levels that exist and the unemployment (even worse, the underemployment) currently in play, the U.S. can't keep the engine running at full speed. We are seeing corporate revenue reports not meeting estimates, housing starts down and the GDP backing off. State and local governments are running into budget deficits. The list goes on...

For people close to retirement, it may be tempting to run to CDs and safe havens. The reality is that most cannot afford to run and hide. People are living longer and longer, so money saved for retirement needs to keep up with the longer life span and inflation. A retiree spends an average of 21 years in retirement, which means that dollar that we talked about would need to grow to $2.28 to keep its buying power, let alone provide income during those years. In the end, it means we need to invest and be very smart about where and when.

Judy Loy, ChFCâ, is a Registered Investment Advisor and CEO at Nestlerode & Loy Investment Advisors, State College, Pa. A graduate of Penn State University, Loy has been with the firm since 1992, assisting clients with retirement planning, brokerage services and investment advice. She can be reached at [email protected]
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