This is Ann Covington of CovingtonAlsina, with your Monday Money Report.
The Federal Reserve Bank cut rates last week by a half of a percentage point. The market had been expecting this cut for over a year, and responded by dropping, then setting a new high, then dropping slightly to close the week up by over 1%. If the cut was anticipated, why did the market react the way it did?
Investors feared the cut meant that the economy was cooling too quickly, and we are about to plunge into a recession. Cooler heads prevailed and the market adjusted accordingly. If you’re a Star Trek fan, the best way to explain is to think of Vulcans – logical and unemotional, and humans – often irrational and overly emotional. In the long run, the capital markets work and react like Vulcans. Companies are making products and providing services that consumers want, and do so profitably, or they aren’t. Over time, the stock price will reflect that. In the short run, markets are human and reflect our fear and greed overtaking logic.
The humans I talk with are feeling those same emotions about the impact of the upcoming election on their investments. And I hear it from both sides, terrified that if their preferred candidate loses, the economy will collapse. Immediately. Remember that presidents are not dictators. While they have some leeway with executive orders, most things need to go through Congress and be enacted as legislation.
Beyond that, the markets don’t really care who is sitting in the White House. They generally perform best when we have a divided government; when the House of Representatives, Senate, and White House are not all controlled by the same party. The cynic in me believes that’s because less gets done. Some may say it’s because legislation that is passed tends to be a compromise of some sort.
Either way, we expect to see a very human blip in November, regardless of who wins. But in the long run, the Vulcans run the markets, as companies are either profitable or they aren’t.
Your action item this week is to review your auto insurance coverage. We usually recommend at least $250,000 per person and $500,000 per accident of general liability coverage, with uninsured/underinsured motorists coverage to match.
Be sure to check out our website at covingtonalsina.com, or our Facebook page, for more information and to register for our upcoming educational events. Don’t forget to drop by with a sweater, fleece, or sweatshirt for #justonesweater.