By Jack Hough
With the Dow rocketing more than 3% higher Wednesday, investors should have few complaints, right?
But what savers need more than a one-day win is a set of safe, stable conditions for socking away cash. They’re getting the opposite at the moment.
The Dow has lost and then regained 7% three times since July, including one round trip since the middle of November. That’s about how much the market has historically returned in an average year after inflation: 7%.
Volatility is one thing. But three reversals of a year’s worth of fortune in just several months makes the stock market look like a place for a couple of days of high-stakes excitement, not a depository for retirement savings.
Savings accounts pay next to nothing meanwhile, and the 10-year Treasury pays barely 2%, which is less than one-third of its average of the past half century. The latest reading on inflation is 3.5% a year, which turns low-yield investments into slow losers rather than safe havens.
The low yields are owed to the Federal Reserve reducing core borrowing rates to historic lows in order to combat an economic slump triggered by, of all things, too much borrowing.
So what got investors so upbeat on Wednesday? It was news that central banks of Europe, the U.S., Canada, Japan, Britain and Switzerland are acting in unison to increase bank access to loans and reduce their borrowing rate. That’s meant to head off a global financial crisis that could be triggered by, naturally, too much borrowing.
If Wednesday’s move makes bank failures less likely, that’s good news. But over the long term, it does nothing to relieve savers of the meager yields on bonds and bank deposits, or the crimping of economic growth brought on by worldwide over-indebtedness, or the extreme volatility in stocks caused by investors caught between these two threats.
If anything, it signals that risks to the global financial system are so high at the moment that central banks will do whatever it takes to preserve lending. Borrowers should be cheering. But savers should view it as just another short-term policy jolt to asset prices, and one that won’t make investing any easier.