Reassurance in the face of a financial crisis

Many Americans want the current economic problems solved overnight. We are scared and in pain. The values of our homes have decreased and, if we are one of the more than 100 million people who have 401(k) plans and individual retirement accounts, there will be more pain as we receive our third-quarter statements.

Be patient; there isn’t any quick cure for this global mess. And, I doubt that either presidential candidate will be able to do much to quickly cure the global economic mess. Converting promises to results is not easy. It's a shame Warren Buffet isn’t a candidate.

If you want to feel a little better, look back. Dateline: October 19, 1987 – The Dow Jones Industrial Average experiences a huge one-day loss of 22.63 percent closing at 1,738.74. Fast-forward 10 years: October 27, 1997, another horrific day on Wall Street; the Dow down 7.18 percent, closing at 7,161.14. That was really scary! During the 10-year period from October 1987 to October 1997, the Dow only increased by a little over four times (7,161.14/1,738.74 = 4.1). At present, the worldwide stock market prices are at about the same level that they were five years ago.

I am not suggesting that in 10 years the Dow will increase from its current low of about 8,500 to 34,000. But, looking back over the past 40 years, there have been lots of significant market declines followed by recoveries and upward movement. According to Ibbotson Associates Inc., large company stocks provided an average return of 12.3 percent a year from 1926 through 2007. And that period included the Great Depression.

Where are we now? There is some good news. Congress finally got around to passing the Emergency Economic Stabilization Act of 2008. Of course they fiddled around for nearly two weeks, but they did take the time to add a lot of pork and other goodies to the bill while getting many hours of free pre-election media exposure. Nonetheless, the legislation is in place and the Treasury Department is moving quickly to implement it. This will help, but not overnight.

The Federal Reserve Bank (working in tandem with central bankers throughout the world) decreased the Fed Funds Rate from 2 percent to 1.5 percent. This change is very significant for two reasons.

First, it is part of an historic worldwide coordinated rate cut. Central bankers worldwide have indicated that they are now working together to fix the financial mess. That is really good news!

Second, reducing the Fed Funds rate will result in lower short-term interest costs for millions of small and large businesses. And, the interest rates should also decrease for those millions of families who have borrowed on home equity lines of credit. I would not be surprised to see the Federal Reserve Bank drop rates another 0.5 or even 1 percent.

We are also experiencing a dramatic drop in oil and gasoline prices. This is like getting a tax reduction! The wholesale price of gasoline is now less than $2.00 per gallon. Great!

The upcoming presidential election is also causing jitters in the financial community. The financial markets do not like uncertainty. Regardless of who wins, this uncertainty will be eliminated.

So, don’t panic. I believe the stock markets are close to bottoming out, and I anticipate double-digit gains in 2009. We are entering a recession, unemployment will increase, inflation should decrease, and housing prices in most areas of the country should stabilize within the next 18 months. But, this is not 1929, and we are not entering another Great Depression.

About the author:
Dr. Robert E. Pritchard is a professor of finance at Rowen University in Glassboro, N.J.