The economy is complicated. It's a giant, tangled web that's subtly and strangely interwoven with geopolitics, current affairs, even the weather. When a major economic event or news story goes down, the effect on the markets isn't generally simple or obvious.
The average financial advisor knows all this. Unfortunately, the mainstream media — think newscasters on the local 6 o'clock broadcast — don't. Or rather they don't always report on economically influential happenings in a way that reflects reality. It's not entirely their fault. They have Teleprompters feeding them lines and 30-second intervals squeezed between the traffic report and sports in which to place the day's business news in context. Not an easy task, even for those with the chops to carry it out.
Some clients (those who closely follow The Wall Street Journal, CNN and CNBC) might have a decent grasp of what's happening and why, but most clients only catch bits and pieces of data. They are prone to reacting strangely to the information they're fed. Here's a look at some recent headline-making news, how the local media might have mangled it and what an advisor can say to keep anxious clients from making hasty or poorly informed decisions.
What actually happened: The Labor Department released its jobs report for the previous month, and it turns out that job creation was (unexpectedly, some say) the weakest it's been in four months.
What the local media might have reported: The weak jobs report means the economy is not growing, and it's an unmitigated disaster for all investors in all sectors.
What you could tell your freaked-out clients: No, it's not the best thing that could happen to the markets on a given day, but, in general, the numbers are consistent with an overall pattern of growth. Plus, it's a good check on inflation and the Fed, meaning it could keep interest rates down, which is a boon across the board. Invested in bonds? You're especially psyched right now.
Speaking of the Fed raising rates…
What actually happened: The Fed raised interest rates a quarter point.
What the local media might have reported: Rates across the board, including mortgage rates, are going to skyrocket.
What you could tell your freaked-out clients: The markets have probably already priced in the change, and your rates aren't going through the roof right now. They might not change at all. No need to dump stocks and cash in your life insurance policy to cover the mortgage on that house you're bidding on.
Speaking of insurance…
What actually happened: Eliot Spitzer sued a major insurance company, accusing it of collusion and price-fixing.
What the local media might have reported: Big insurance companies are all guilty of fraud, the industry is on the verge of collapse and your personal policies (homeowner's insurance, auto insurance) have been priced unfairly for years.
What you could tell your freaked-out clients: Insurance is more in the spotlight than it's been in years, yes, and insurance stocks will take an initial hit, but nothing drastic is going to happen to the industry quickly. Oh, and don't get all belligerent if your insurance bill stays the same. No one is going to see any changes right away.
Speaking of Eliot Spitzer…
What actually happened: A little more than a year ago, Spitzer attacked mutual funds, demanding more regulation of trading practices and fees.
What the local media might have reported: Mutual funds, those old reliable investment vehicle, are on the verge of collapse. And in the meantime, there won't be any more fees.
What you could tell your freaked-out clients: Remember this one? Are mutual funds still around? And (sorry), are you still paying fees?
Speaking of paying…
What actually happened: Online holiday shopping has displaced a percentage of in-store retail shopping.
What the local media might have reported: Holiday shopping numbers are way down, yet another sign of a flagging economy.
What you could tell your freaked-out clients: Actually, when you combine in-store and online sales, consumer spending was up this holiday season. Things aren't so bad.
Speaking of consumer spending…
What actually happened: The minutes of a recent meeting of the Fed suggest that inflation isn't completely in check.
What the local media might have reported: Inflation is going to skyrocket out of control, and consumers are going to feel the punch.
What you could tell your freaked-out clients: The Fed has reasonable control of the situation, but yes, they are probably going to raise interest rates a few more times in the coming months. They've been insanely low for a long time; did you honestly think they'd stay that way forever? Remember when they got so low — and the economy was tanking? Do you really want to be back there right now?
Speaking of going back somewhere…
What actually happened: A major airline announces a new plan to cut fares in an effort to stave off bankruptcy.
What the local media might have reported: That the move has touched off a fare war that will have far-reaching repercussions — likely negative ones — for the entire industry.
What you could tell your freaked-out clients: There's no doubt that the airline industry is in trouble, with the nation's second-largest carrier, United, in bankruptcy, and the third largest, Delta, scrambling to avoid the same fate. The fare wars touched off by Delta's price slashing are pummeling the industry's stocks, and few observers see the situation stabilizing any time soon. Still, a handful of carriers eventually will emerge victorious from this mess, and advisors can help in making a decision on whether to try and pick the winners or to stay on the sidelines until the dust has settled. It is these situations where advisors earn their keep.
Writer's BIO: Christie Matheson,
a former investment banker, is an editor at Boston magazine.
