The stock markets have been on an unpredictable roller coaster the past few days, suffering the sharpest drops since the financial crisis hit three years ago, then surging back on Tuesday.
After the S&P 500 downgraded the US’s credit rating from triple-A to double-A, many investors panicked at the US’s potential to default on its principle and interest payments. Though the Dow lost over 630 points or 5 percent, Monday, it rallied to regain 420 points, or nearly 4 percent, by the end of trading Tuesday.
In response, the Federal Reserve stepped up to the podium Tuesday to announce that it would keep interest rates near zero until mid-2013 to encourage spending in this weak economy. Businesses and entrepreneurs would be able to borrow without paying more interest for almost two years.
So what does this volatility mean for San Carlos and individual investors?
How San Carlos is affected
Rebecca Mendenhall, the city’s administrative services director, said she has not received any numbers or reports yet from the county or LAIF (Local Agency Investment Fund) depicting the damage done by the dipping market, though she does expect some losses.
“I do expect it made an impact on our portfolio but until I see the numbers I won’t know to what extent,” Mendenhall said.
San Carlos has $31,244,200 invested in both the county pool and LAIF, according to city documents (nearly $19 million invested in the county and just more than $12 million in LAIF).
"It’s a bad sign for local government,” said Nick Bloom, associate professor of economics at Stanford University. “This is now the second uncertainty shock and we only had one year of normal growth. Generally it’s going to make it harder to raise taxes and revenue which means more cutting, and a lot of these small cities have already made major cuts.”
Bloom’s words ring especially true for San Carlos, who have contracted out police and fire services in the last year, along with park and recreation services, to help erase what was once a more than $3 million deficit.
“Some cities in San Mateo County have made radical cut backs to balance the budget,” Bloom said, “now they may have to go through a second round a fiscal cutting. It’s not good news for California. It’s like we’ve had a fiscal famine, and we’re sick, but now we’re headed into another famine and we never had time to recover.”
The current situation, while not as significant as the 2008 crash, has potential to hurt the financial futures of local governments due to a lack of recovery time. The multitude of fiscal hardships incurred by these small municipalities takes a toll, he said.
“The next six months are going to be tough,” said Bloom. “I think spring 2012 things will start recovering again. It’s a broken record of 2008. We thought 2010 would be a period of rapid recovery. But here we are again."
County and State:
The San Mateo County Treasurer manages all city and school district investments in a county pool. Because these investments are required to be in bonds, not stocks, Treasurer Sandie Arnott said, municipalities won't see any losses due to stock market volatility.
"Regardless of the downgrade, [U.S. Treasury bonds] are backed by the good faith and credit of the U.S. government," Arnott said. "Our investments are doing quite well. There’s nothing on our end we need to be too concerned about."
Arnott said most county investments are required to be in bonds that two out of the three credit rating agencies have rated AAA. Should Moody's or Fitch downgrade the U.S., the San Mateo County Board of Supervisors would need to amend its policy.
When Lehman Brothers collapsed in 2008, the county pool lost $155 million it had invested with the firm. The lost nearly $6.6 million, but decided not to file a lawsuit. Twelve school districts are suing the county for $20 million in losses.
But Arnott said such a scenario isn't a threat now because the county has diversified its holdings. Her July investment report, released Tuesday, details the diversification.
The county's pension funds, managed by externally by SamCERA, are invested in stocks and will be affected by the stock market's recent volatility.
"The pension fund is a long term fund," Arnott said. "You ride it out. The stock market is always up and down and up and down. Everyone’s hoping the economy does turn around. It’s not going to be tomorrow; it’s going to be a while.
What can you do?
Many investors reacted with myopic vision rather than adhering to their long-term goals.
Investors need to still think long-term and closely examine their portfolios, Amann said.
He suggested diversifying portfolios with stocks and bonds, not simply tying up all your investments in one company. Then, he said, put down the newspaper.
Monday’s headlines “US Stocks Plunge Again” and “Stocks Suffer Sharpest Drop Since 2008” from some of the world’s most influential papers further fueled investors’ fears.
“I tell my clients, ‘The best thing you can do is to stop listening to the news,’” he explained. “There’s not a lot of control you have as an individual investor.”
And as Wall Street soared back Tuesday, one should never make short-term decisions based on one day’s performance.