The Dow Jones Industrial Stock Index started the week on Monday, January 26 standing at 17,672.6, where it had closed the previous Friday after a 141.38 sell-off. Monday morning it lost another 100 points, but by the end of the day it had recovered and was up 6.1 points. On Tuesday, the Dow Jones Index lost 291.49 points. On Wednesday the index lost another 195.84 points. Thursday seemed brighter, with the index moving up 225.48. Alas, the Dow Jones Industrials fell 251.9 points on Friday, to end the week at 17,164.95, a loss of 513.75 for the week, and a loss of over 650 points if you add in the previous Friday.
To put these numbers into perspective, the Dow would have to rise an average of 27 points per week to gain an 8% return for the whole year, close to its historical average return. The last six trading days wiped out nearly a half-year of average gains.
There are many explanations. Oil prices, Fed statements, European currency moves, elections in Greece, violence in the Ukraine, etc, etc. But these are not satisfying to the average Sally and Joe. They just want to get off the roller coaster, and find a safe place for their retirement savings. They would just like to earn a little more than inflation, to improve their life in retirement.
The best interest rate available on a one year CD is 1%, not even enough to keep up with inflation, which was 1.4% last year (the Fed would like to see inflation at 2%). Government Bonds are no better. The fixed portion of the rate on I-Bonds is 0%. (I-Bonds are inflation adjusted savings bonds for individuals.) The yield on 30-year government bonds fell to 2.243% last week, a record low. (Warning: Long term bonds such as the 30-year bond lose a lot of value when interest rates increase. Avoid these bonds unless you know what you are doing!)
I do not believe gold is the answer. I realize that gold has been an historical store of value and may provide some shelter even in modern economies. But gold investing is the equivalent of hoarding, not saving. It is useful to society that people save, and lend their purchasing power to build new roads, factories, and businesses for the future. It is not useful to society for people to lock away their purchasing power in a hoard of gold. Some will disagree with me on this, but that's my view and I'm sticking to it.
The "wags" on Wall Street call this the TINA market, as in "there is no alternative". Thanks to six years of ZIRP (zero interest rate policy) by the Federal Reserve, ordinary people seeking a return on their savings have had no alternative but the stock market. So far the result has been good for savers brave enough to venture into the stock market, even if not good for those savers holding onto their bank account. The market is up over 150% since it bottomed in March, 2009. Unfortunately, the economy has not advanced at the same pace. Nominal GDP (including the effects of inflation) has increased only about 4% per year. Further increases in the stock market depends on better progress in the economy. Signs of weakness, such as appeared last week, trigger the roller coaster; many want out, but there is no place to go.
Here is a suggestion for the government: Bring back an honest government savings bond, designed to help the ordinary Sally and Joe save for their future and for their country's future. Give us a real alternative to the TINA market. The honest savings bond should carry a permanent 2% interest rate, thereby setting a floor under short-term interest rates. The honest savings bond should pay additional interest to offset fully, without tax, the effect of inflation, which would otherwise eat away purchasing power. There should be reasonable limits on how much can be saved by an individual using the honest savings bond. That limit should allow Sally and Joe to rollover a significant amount of their retirement IRA and 401(k) into the honest savings bond, so that they can sleep better as retirement approaches.
Such an alternative would have a salutary impact on savings and investment, and protect the unwilling from a week like last week.