Stock Market Roller Coaster: What Does It Mean for South City?

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 U.S.’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. The markets have continued to fluctuate all week.

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 additional interest for almost two years.

So how concerned should South San Francisco and individual investors be?

Redwood City Patch Edward Jones financial advisor David Amann explained that Monday’s downgrade wasn’t cause for fear or alarm. He stressed that the downgrade did not mean default, and that the U.S. would still be able to pay back its debts.

The sudden reactions to the downgrade caused many worried investors to rashly pull out their investments, he said.

“A lot of it is emotion rather than rationally thinking long-term,” Amann said.

Decisions to sell Monday were also compounded by concerns about the generally weak economy despite the Fed’s attempt to spur growth. The federal government released its job report Friday, with unemployment numbers stagnant at 9.1 percent.

But this dip is a classic fall-out, Amann advised. He recalled an incident back in April 2010 that had rocked the markets: the BP oil spill in Louisiana. It cost the company alone $20 billion in market share.

Yet the markets recovered.

“Will people remember this 18 months from now?” Amann said. “Probably not.”

He added that Asian markets have continued to tumble, affecting the US markets in this highly connected global economy. The Nikkei 225 in Tokyo was down 3.7 percent, while the Kospi in Seoul fell 6.2 percent, reported the New York Times. Shares in Australia sank 2.9 percent, and early indicators suggest that this trend could continue across the globe.

How is South San Francisco affected?

The San Mateo County Treasurer manages 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 over $500,000 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.