More Of Same Likely For Investors
Ed and Donna Brown worry that time is running out.
They watched 30-year, fixed-rate mortgages rise more than 2 percentage points last year, and fear that the climb isn’t over yet.
The couple has been trying to sell their Highland Township, Mich., mobile home since November while they look for a single-family home in the $150,000 range.
But it seems that every other day the couple reads that interest rates are going up, making their first-time home purchase more expensive.
“It’s a catch-22,” said Ed Brown. “Do I rush out and buy something before interest rates climb too much higher? Or do I sit back and find the house I really like and live with the increased payments?”
Welcome to 1995, where life will likely be more expensive, and investments may remain on life support. That’s the consensus among economists, bankers, real estate executives, and money managers.
Expect everything from homes and cars to clothes and groceries to cost more. Brace for the interest rates you pay to continue their climb. You’ll likely make more - but not much more - money than you did last year. Nevertheless, you’ll probably buy fewer things.
And expect your IRA, 401(k), college funds, savings and other interest generating investments to do a little better than last year. But frankly, that’s not saying much.
In short, expect 1995 to be a lot like 1994.
The Federal Reserve jacked up interest rates 2-1/2 percentage points last year, hoping to increase the cost of everything from mortgages to credit card purchases.
Expect the Fed to continue raising interest rates, at least another threequarters of a percentage point, according to the University of Michigan, and perhaps by as much as 2 percentage points, said Comerica economist Bill Wilson.
That could spell bad news for stock market investors.
As interest rates rise, bond and cash investments - CDs, money market funds - pay higher interest. That makes the average 2.9 percent dividend yield on stocks increasingly less attractive, because investors can make 5 to 8 percent with less risk.
Bond investors may fare better this year, although that shouldn’t be too hard. According to the Merrill Lynch Government and Corporate Bond Index, bonds lost 3.3 percent last year.
Stocks ended 1994 only modestly better, rising 1.3 percent, provided you reinvested dividends.
Some analysts fear the financial markets may be roiling this year.
“The chances of making it through 1995 without a recession are less than 50-50,” warned Jim Stack, president of InvesTech, a Montana-based consulting company. “The chances of making it through the 1996 election without a recession are less than 20 percent.”
Housing may provide the first indication of whether Stack’s doleful prediction will come true. Because it’s so sensitive to changes in interest rates, the housing market can be expected to slow as rates rise.
The University of Michigan predicts that vehicle sales will stay strong, reaching 14.9 million vehicles. Although a healthy number, it’s about the same as 1994 sales, and probably won’t get any larger in 1996.
Stack of InvesTech and other analysts point to March 16, 1991, as the beginning of the current economic recovery. That means we’re in the 46th month of recovery.
But Stack noted that since the beginning of the century, economic recoveries have averaged 40.4 months. In that light, the current recovery is on borrowed time.
“Watch the Dow Jones Industrial Average,” said Stack. “That will be a strong indication whether the economy will slow dramatically. If the Dow drops under 3,500, the odds are overwhelming that we are heading into recession.”
David Sowerby, chief economist for Ann Arbor, Mich.-based Beacon Investment Co., isn’t quite as pessimistic.
Sowerby said he expects both stocks and bonds to finish this year up, but no more than 4 percent to 8 percent for stocks and 5 percent to 6 percent for bonds.
So what should investors do? Try some of the following advice:
If you’re investing for the very short term - a year or so - stay 100 percent in short-term U.S. Treasuries, CDs or money market accounts.
If you need your investment money in about three years, put about 70 percent in stocks and 30 percent in bonds. You’ll be reducing the risk of stocks alone by diversifying into bonds.
If you’re investing for five years or more, stay with stocks. Historically, stocks have provided the highest returns.
Just remember to buy various types of stocks: 50 percent of your money in blue-chip stocks or stock mutual funds, 30 percent in growth stocks and 20 percent in an international mutual fund.
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