We’re in for a bit of an economic storm, according to a local business professor.
Norm Smith, coordinator of the bachelor of business administration at Laurentian through Georgian College, said the stock market has taken a hit this week.
The first bad news was Lehman Brothers – an investment bank – declared bankruptcy.
“Monday was the big day, with Lehman Brothers going belly-up. It’s the fourth largest investment bank in the United States. And no one’s coming forward to bail them out, nor should they,” said Smith.
The stock market went down more than 500 points from that news. On Tuesday, the Toronto Stock Exchange went down 150 points.
“This naturally rattles people.”
The second piece of news was the Bank of America bought out Merrill Lynch for $50 billion.
The third shakeup came when the U.S. Federal Reserve announced Tuesday it is giving AIG an $85-billion loan, to save it from bankruptcy.
If you’re invested in Lehman Brothers, “you’re looking at a force-five hurricane right now,” said Smith. “If you’re an everyday investor, you’re facing a tropical storm.”
But if the trend continues, Smith fears a category 1 hurricane will hit general investors.
High gas prices and increased grocery bills may be affecting consumers, but core inflation overall is fairly stable, he said.
And this isn’t the time for investors to head for the hills.
“This is the mania you get. When things are going up, people say they want to buy. When things are going down, they want to sell. The smart investor does the opposite.”
Smith said people should clear up their debt, but keep a long-term vision on their investments.
Keeping a diversified portfolio is key to keeping investment more stable.
“Now, more than ever, you’ve got to live within your means.”
Just because the market is in a downturn and prices are low doesn’t mean a newcomer should start investing, he said. “The only trouble with declining markets is that you buy in and they decline further. Most people don’t have the stomach for that. Never invest what you can’t afford to lose.”
Before the stock market can turn around, there’s got to be a bottoming out of the housing market in the states, said Smith. “And I’m not sure we’re there.”
However, the Bank of Canada should reduce interest rates to make sure there’s enough cash available, he noted.
Mark Lyon, senior vice-president and manager of TD Waterhouse, said his clients have voiced concern about the economy.
“Our job is to make sure they are appropriately counselled and reassured that the long-term horizon is not being permanently altered,” said Lyon.
Someone with short-term investments could get into trouble, whereas long-term investors generally do OK, he said.
“We saw this happen when the tech bubble burst in the early part of the decade. High-tech firms went by the wayside because they were vastly overvalued.”
Some may remember the Enron and WorldCom situation 10 years ago, which also affected the stock market, but that situation was fraud-related, said Lyon.
The good news is that historically, whenever there has been a drop in the stock market, it always comes back, said Lyon. And it usually comes back higher than before.
