Over the past few weeks, the country’s attention has been riveted on the presidential election. Of course, we didn’t exactly forget that we’re in difficult economic times, but we did have something else on which to concentrate our thoughts and energies. Now, however, the election is over, and, for many of us, it’s back to focusing on the economy and our investments. By taking a closer look at the current state of affairs, you may find that the situation is more promising than you remembered, back before your thoughts were diverted by polls and prognostications.
To begin with, let’s look at what’s been happening to an economic indicator that, while actually quite important, may not be well known to you or many other investors.
LIBOR (London InterBank Offered Rate) is the interest rate that banks charge each other for one-month, three-month, six-month and one-year loans. This rate is initially charged by London banks, and is then published and used as the benchmark for banks rates all over the world. The LIBOR rate can matter to you in several ways. First, if you have an adjustable-rate loan, such as a mortgage, and your rate resets, it is usually based on the LIBOR rate. Even if you have a fixed-rate loan on, say, a credit card, and you pay it off each month, an increasing LIBOR will affect you by making all types of consumer and business loans more expensive. This reduces liquidity, which slows economic growth.
And that’s why it’s such good news that LIBOR has fallen steadily for the past few weeks. A lower LIBOR can significantly ease the flow of credit — and, as you’ll recall, the frozen credit market was one of the chief culprits of the financial meltdown.
Apart from a falling LIBOR, what other positive developments have we seen in the financial markets? For one thing, talk about a coming “depression” has largely faded from the scene. Furthermore, stock prices, while still volatile, have shown some upward movement in recent weeks. Before the two-day plunge of November 5 and 6, the S & P 500 closed 17.7 percent higher than its low of 848.92, reached on October 27. A 20 percent rise would have technically marked the end of the current bear market and the beginning of a new bull market. But even after the sharp two-day drop, the S & P 500 was up nearly 10 percent from its October 27 low point.
Still, no one can say that the stock market has already hit bottom. With the economy struggling, it’s unlikely that corporate profits will be robust in the months ahead — and corporate profits are a key driver of stock prices.
But there may be a bright side to this picture: Based on traditional measures of value, stocks are now relatively inexpensive. Much of the poor economic news may already be reflected in current stock prices, so, based on today’s price levels, high-quality stocks could well provide attractive returns in the long run. Over the short term, though, be prepared for continued volatility, possibly including large day-to-day price drops.
These are challenging times for investors, but good opportunities are out there. To take advantage of them, you need courage, discipline and patience. Remember, tough times don’t last — but smart investors do.
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