Eight things the plunge means for your money
BY BRETT ARENDS, THE WALL STREET JOURNAL — 05/07/10
Athens burns. Europe panics. Something funny happens in the market. The Dow plunges nearly 1,000 points in a few minutes.
Is this 2008 all over again? Should you panic? Bail while you still can?
OK. Take a deep breath. Breathe. Ommmm …
Here are eight things this means for your money.
1. Now you know why I love investing in boring blue-chip stocks. The duller, the better. Not only are many of them priced pretty reasonably right now: They let you sleep better, too. Be honest: When you heard about the Dow or saw the footage from Athens, your thoughts immediately went to that exciting new “aggressive” fund your broker just sold you. Did you really worry about your Kellogg stock? (Of course even dull blue-chip stocks can be volatile. But the companies rarely vanish and it is usually temporary. In the case of Procter & Gamble , hit briefly on Thursday, the panic ended very quickly.)
2. The debt crisis in Europe is more bad news for savers. It means Europe will probably have to keep interest rates lower for longer, and that will put more pressure on the Fed to follow suit. Already you’re getting bupkus on your savings: The average money-market account is paying about 0.76% interest, and a one-year certificate of deposit just 1.2%, according to Bankrate.com. Those are abysmal rates, and compared to inflation—the official rate is 2.4%—you’re losing money.
3. Here at the Silver Lining Dept., we like to point out that the above is good news if you’re looking to get a mortgage. The panic has sent long-term rates tumbling again: The rate on 30-year conforming loans is down to 5.07%, according to Bankrate. And that’s likely to fall further, following the fall in Treasury yields. The yield on 10-year Treasury bonds issued by the Federal Government has fallen to 3.4%, from 4% a month ago. That’s a big move.
4. And if you are in the market for stocks with decent yields, take a look at some of the blue-chip names knocked down in the panic. Verizon , now $28, has a dividend yield of 6.6% according to FactSet. Rival AT&T, $25.14, yields 6.5%. Johnson & Johnson , $63.40, yields 3.3%. Coca-Cola , $52.30, 3.3%. Chevron , $77.20 (down due to the Gulf crisis as well), yields 3.6%. %. (Obviously stocks are not bank accounts—prices vary, and dividends are not guaranteed!)
5. Big European names have plunged even more. Stocks like Eni , the Italian oil company, and Telefonica , the Spain-based telecom giant, have crashed more than 20% in a few weeks. Political troubles aside, these are pretty strong companies. Even London-based Diageo , the world’s biggest alcoholic-drinks company, has come down sharply. (Diageo is the company behind Guinness, Smirnoff, Captain Morgan and a whole swath of Scotch whiskeys). The stock’s yield is 3.7%. People will not drink less whiskey in a crisis. If anything, they will drink even more.
6. High-yield bonds—those issued by more-debt-laden companies—just tanked as some investors rushed to dump anything deemed “risky.” The iShares High-Yield Bond exchange-traded fund briefly plunged nearly 10%, to lows last seen last summer, before rallying late yesterday afternoon. Even now, at $84.50, the yield is north of 8%, based on the last month’s distributions. The fund offers a broad spread of bonds across industries. But anyone investing in such bonds should try to do so in a tax shelter like an IRA or 401(k), as bond coupons are taxable as ordinary income.
7. Beware of “safety.” Thirty-year Treasury bonds now pay a paltry 4.1%, 10-year ones just 3.4%. Investors flock to them in times of uncertainty but they leave you at the mercy of inflation. You are getting paid very little and your bond coupons, unlike stock dividends, will not adjust over time to reflect rising prices.
8. Even those old investment stalwarts, inflation-protected government bonds, now look unappealing. Treasury Inflation-Protected Securities, or TIPS, offer poor value at current levels. The “real,” or post-inflation, yield on the 10-year TIPS bond is just 1.25%, that on the 30-year 1.73%. The rule of thumb says these figures should be well above 2% for investors to get a decent deal.
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