CHICAGO-Growing nervous as a possible US government default draws ever closer, more and more ordinary investors are calling their brokers and moving their money out of stocks and mutual funds for fear of a plunge in the market next week. The stock market declined for a sixth straight day yesterday as financial advisers fielded a new round of calls and emails from clients wondering whether to get out or sit tight. Investors pulled about US$32 billion out of money-market mutual funds for the week that ended Wednesday, according to fund tracker Lipper Inc.
That is just a tiny fraction of the US$2.6 trillion invested in such funds. But the exodus appeared to be accelerating at week's end as Tuesday's deadline for reaching an agreement on Capitol Hill drew near.
Sean Sproul, a utility analyst in Columbus, Ohio, shifted all of the money he had in stock mutual funds into the most conservative bond fund his company-sponsored retirement plan offers. Sproul said he feared that if he waited until Monday, it would be too late. That sentiment was shared by Paula Schmidt, an IT consultant in San Jose, California. She sold all her bonds this week and is holding the money in cash until the standoff in Washington is resolved. "The only safe thing to do is park my money and wait and see," Schmidt said. "It's a free-for-all right now in Congress, and the US and global markets will react negatively."
Seeing one of her investments lose US$30,000 in a single week during the market meltdown in 2008 still stings. Her retirement savings did not recover until the end of last year. Officials in Washington, including Treasury Secretary Timothy Geithner, have warned that a default could have catastrophic economic consequences. If a deal isn't reached by Tuesday to raise the debt ceiling and propose measures to reduce the deficit, the uncertainty could trigger steep declines for stocks and bonds, even a return to recession. At a minimum, interest rates would almost certainly rise, raising the cost of mortgages, credit card accounts and other consumer loans. Financial advisers are generally urging clients to remain calm and stay invested because of the difficulty of timing the markets and the strong likelihood that any losses will ultimately be recovered and then some.
The potential market turmoil is more alarming for those who have more immediate needs, such as those contemplating retirement in the next few years or parents whose children are entering college.
Besides moving their money into cash, investors also have been buying gold on fears of a US default. The price of gold topped $1,600 an ounce for the first time last week. And despite all the questions surrounding the government's credit standing, investors have still been flocking to US Treasurys.
That suggests they are confident the government will continue paying bondholders even if the politicians fail to reach a deal. Starmont Asset Management, a San Francisco-based manager, has been calling and emailing its 120 clients this week, asking whether they want to move some of their assets into cash. As much as 80 per cent have opted to do so. A few have asked that all their stocks be sold and the proceeds be invested in gold, silver and Swiss francs. (AP)