Market Volatility: Where Will It End?

The markets opened this year, after a modest upturn at the end of last year, and promptly began to slide again. At the end of day on Tuesday, February 24, the Russell 3000 ® Index, which measures the broad U.S. stock market, was down more than 13% since January 1, 2009.

Why do stock prices continue to fall? The major reason is that the nation's economic, financial, and business outlook is still poor.

Economic growth, which likely fell over 5% on an annual basis during the last quarter of 2008, could fall another 4% during this quarter. The economic stimulus package, which was welcomed by most experts, should have immediate positive psychological effects, but little substantive effect until later in the year.

The financial system continued to suffer as major banks lost assets and credit markets showed signs of limited revival only in recent weeks.

Business conditions have also been difficult. Consumers rapidly reined in spending for almost everything, including autos, houses and clothing – big – as well as smaller-ticket items. Corporate earnings, with certain exceptions, continued to decline and will likely do so throughout the rest of the year.

Colleges and universities began to be hit hard. State government cutbacks of support for public higher education became visible. And the decline in value of many college and university endowments in the latter half of 2008 began to affect private institution spending and some public institutions.

Are there any bright spots? One positive factor is that the government remains determined to solve the economic and financial crisis through aggressive new spending and regulation. Another encouraging sign is that other nations are undertaking similar efforts. Since the current challenges are global in nature, their steps are a crucial part of an eventual solution. Energy prices, by falling significantly, have provided an income boost to most Americans.

What should investors do?

• First, talk to a trusted adviser. TIAA-CREF offers expert assistance in person at local offices around the country and over the phone.
• Second, consider your long-term plan, not just what you see in the daily news.
• Third, create or maintain a diversified mix of assets designed to balance return potential with investment risk; this may require rebalancing your existing portfolio to help ensure your asset allocation stays on track.
• And fourth, consider saving more, even in hard times like these.

Some of our current problems are cyclical in nature and will pass. Others are structural and will require the kinds of reforms and further spending that we – and other nations – are beginning to implement. It will take some time for markets to return to full health, but wise investors will use this time to assess and position themselves for the eventual upturn.