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Making sense of the volatility in the marketArticle added by Michael Pinkans, CFA on August 17, 2011
Mike Pinkans

Michael Pinkans, CFA

Freehold, NJ

Joined: July 18, 2011
Are Your Clients Behind in Their Retirement Plan Timeline?
What's really going on with the marketplace volatility, and are we headed for another recession? What does this all mean for the insurance industry?

In economics, "delta" means change and "I" stands for interest rates. Our goal is to provide you with solid economic news that can help explain changes in the economic environment not only affecting your business but providing you opportunities to take advantage and stand apart from your competition.

Making sense of the volatility in the market

On Tuesday, Aug. 9, 2011, the Federal Reserve voted to hold interest rates at zero and suggested it would keep rates there through the middle of 2013. The markets reacted positively with the Dow Jones Industrial Average closing up 429.92 points (3.98 percent) for the day. Can the Federal Reserve really promise this? Of course not. It's the Fed's hope and intent to keep rates low through 2013, but it can't promise that it will.

The following day, the DJIA dropped 519.93 points (-4.62 percent) based on European debt fears, but recovered on Aug. 11, 2011 by increasing 423.87 points (3.90 percent) — the latest increase due to a favorable U.S. jobs report.

What's really going on with the marketplace volatility, and are we headed for another recession?
  • The Standard & Poor's downgrade of the United States debt from AAA to AA+ on Friday, Aug. 5, 2011 is a short-term non-event. While it is true that the DJIA dropped 634.76 points (5.50 percent) on the following Monday, 10-year Treasury yields fell to 2.36 percent as investors rushed to the safety of the United States. Make no mistake about it, United States debt is still the safest bet. The United States has a longer term debt issue for sure, but...

  • European banks in France, Italy and Spain may experience a significant credit crunch. Unlike the fall of 2008, when the U.S. banking system experienced a credit crunch, liquidity is not an issue in the United States. U.S. corporations are hoarding cash and have built up over $1 trillion in cash combined. Our banking system has plenty of money to loan. However, this is not the case for some European countries. European banks are holding sovereign debt (i.e., Greece), which are requiring write downs. Reserves at these banks also need to increase, forcing a credit crunch. Hence, the European Central Bank is buying the bonds of Italy, Greece and Spain to alleviate rapid interest rate increases in these countries. However...

  • The Euro as a currency has significant problems. In 2008, when the United States wanted to increase liquidity in the banking system, it printed money. The liquidity issue was easily solved, but led to the current debt issue. A single country in the Eurozone doesn't have the ability to print Euros to increase liquidity; only an agreement between all the Eurozone countries can make that decision. Hence the liquidity crunch in some Eurozone countries, thus...
  • Money will continue to flow into safe U.S. debt as fear remains in the market. As a result, interest rates will remain low. All that could change with another downgrade by Standard & Poor's, but that doesn't seem likely.
Are we headed for another recession? The short answer is probably not. With a U.S. dollar that continues to lose ground against other major currencies, our exports have become less expensive. But last month our trade deficit increased, meaning that foreigners aren't buying as much of our goods.

In spite of this, the U.S. economy is still much stronger than it was in the fall of 2008. Of course, anything can happen; but it appears that our economy will grow, albeit at a slower pace than everyone would like to see.

What does all this mean? Customers will continue to want guarantees, liquidity and flexibility along with tax advantages. Only insurance and annuities can provide these options. Guaranteed liquidity riders with life insurance, guaranteed income from annuities, and guaranteed leverage with linked benefit contracts that include a 100 percent guaranteed return of premium are exactly the type of products that our customers need. The opportunities are endless.
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