War And Your Money

After seeing the economic bubble burst a couple of years ago, and now facing a possible war, investors are navigating in uncertain times, says The Early Show financial adviser Ray Martin.

Early last week the stock market took a nosedive, but over the past five days the Dow Jones gained 670 points, or nine percent, which is more than expected over the course of a year.

According to Martin, the uncertainty of war is finally lifting. Before this week, business managers and investors were frozen; they didn't know what to expect from the world and weren't willing to make any major decisions. The risks of stocks seemed much higher than the benefits, and there was little market demand.

Now, however, it's clear that war is on the way. Investors can begin to make calculated decisions again by factoring in the risk of war. Martin points out that Wall Street is not betting on a war outcome. The markets going up do not mean that investors assume we are going to quickly crush Iraq.

Many people will see the rising market numbers and think that the economy must be improving. That is incorrect, Martin said. The only thing a rising Dow means is that the fog surrounding a possible war has cleared.

Other sectors of the economy are struggling as well.

A lot of people are out of work right now. Earlier this month, the government reported that the country's unemployment rate edged up to 5.8 percent in February. The number of people who lost their jobs last month was the highest since November 2001 - right after the terrorist attacks.

Even more troubling is that a growing number of the unemployed have been out of work for 27 weeks or more. (Unemployment benefits expire after 26 weeks.) Last year at this time,15 percent of job seekers had been pounding the pavement for close to seven months; that number has grown to 22 percent.

Americans are also being hit with record-high gas prices. The national average now stands at $1.73. Californians will loudly remind you that they have far exceeded the national average - drivers are shelling out over $2 per gallon on average.

Other signs of a troubled economy:

• Retail sales were down another 1.6 percent last week.
• Businesses are not stocking full inventories for the spring and summer because they don't see any consumer demand on the horizon.
• The number of people borrowing money from their 401(K)s is on the rise. According to Martin, this is a signal that people are "financially exhausted" - they have nowhere else to turn.

• Americans' confidence in the economy is at its lowest point since 1992, according to a survey from the University of Michigan.

Martin says rates probably won't drop further. In fact, he predicts rates will rise as the war ends. Homeowners take note: this may be your last great opportunity to refinance!

An economic drop preceding a war is a historical trend - something that America usually suffers before a major conflict. The economy tends to grow during war because of defense spending and increased demand for labor. It then continues its upward swing after war is won.

We saw this play out during the nation's last war in the Gulf and after Pearl Harbor, for example. In both instances, it took about three years for the economy to recover. After the Gulf War, things really took off with the markets building to all-time highs.

Unfortunately, Martin said, we should not expect to see this type of dramatic increase anytime soon. While the economy will recover some after a war with Iraq, it will not grow the way it did after the Gulf War.

"Don't expect a rebound or a large gain," Martin said. "It will be more likely that one day the market's up 400, the next day it's down 300."

Why won't 2003 look like 1991? Because in '91, the economy was not coming off a big stock market bubble, Martin said, nor had it suffered from rampant accounting fraud. Equally important, the nation had not suffered terrorist attacks like Sept. 11. All of these things promise to keep the economy somewhat suppressed.

On an optimistic note, Martin believes the economy is probably close to hitting bottom. How is that optimistic? It means things won't get much worse than they are right now. Granted, it promises to be a tough economic year. Ray suggests people come to terms with this fact and set expectations accordingly in order to minimize financial harm.

So what should we all be doing in the meantime? Martin has three fast suggestions:

1. Increase your emergency funds from three to six months worth of expenses to six to 12 months.
2. Contribute enough to your 401(K) to receive your employer's match, but nothing more. Instead, use that extra money to pay off debt. You're losing 18 percent on debt; by getting rid of it you're handing yourself an 18 percent return — something the market sure can't do right now.
3. Reduce your costs on everything you spend. Cash is an important asset now, Martin says, so hold on to it.