Reactions to default uncertain

With time running out to raise the nation’s debt ceiling or default on our debt, anxious investors sent Wall Street sharply lower Wednesday, but economists and financial planners in Las Vegas said it’s not yet time to panic.

If the United States doesn’t raise its debt ceiling by Tuesday, government workers and Social Security recipients might not get checks, but Stephen Brown, director for the University of Nevada, Las Vegas Center for Business & Economic Research, said the impact on the local economy is “really unknown.”

“We have never defaulted on our debt obligations before,” Brown said.

At worst, he said, “Las Vegas is going through a pretty bumpy recovery. This would slow the region’s recovery.”

The Dow Jones Industrial Average finished the day down 198.75 points, at 12,302.555. The loss was the fourth down session in a row and the largest so far. The Dow fell 43 points Friday, 88 points Monday and 91 points Tuesday.

John Futrell, owner of Futrell Financial Management Inc. in Las Vegas, said the standoff in Washington has instilled fear in the average investor, making the market unpredictable.

“Investors are sensitive in the wake of the economic meltdown in 2008,” Futrell said. “We are advising them just to hold their position for now.”

Futrell said that he is confident an agreement will be reached but that investors and the markets simply will focus on the next crisis.

The most immediate effect of a default, economists have said, would be an increase in interest rates. Many interest rates are tied to the Federal Reserve’s Fed Funds Rate, which is what banks charge each other for loans.

As that rate rises, everything that is linked to it would go higher too, Brown said

Credit cards, mortgages, student loans and car loans could see big increases.

In April 1979, the country was technically in default after a last-minute agreement on the debt ceiling caused a delay in some Treasury bill payments.

“Those missed payments sent interest rates higher by 50 basis points,” or a half-percentage point, said Stephen Miller, chairman of the College of Business at UNLV. “They would rise even more than that now.”

Brown speculated that interest rates could rise 3 percent to 4 percent.

The threat of higher interest rates has meant a boost in business for at least one Las Vegas auto dealer.

“We’ve seen a dramatic increase over the last 12 days,” said Rich Abajian, general manager of Findlay Toyota. “Our business is up about 33 percent, as our customers want to lock in a zero-percent interest rate.”

Findlay in Henderson has gone from selling 10 to 12 cars a day, to selling around 18. Abajian attributed the increase to concerns that interest rates would rise if no agreement is reached.

Financial advisers say those kinds of purchases are short-sighted. They typically tell clients not to try anticipating a short-term move in the market.

Stephen Johnson, with Raymond James Financial Services Inc., is no exception.

“I’m telling my clients they need to have a long-term outlook,” said Johnson, who manages the 401(k) plan for the Las Vegas Chamber of Commerce.

He and other financial advisers said Wednesday clients are asking whether they should withdraw money from the stock market or cash out retirement plans. Their answer is no. Cashing out a 401(k) might be unnecessary and would mean paying income taxes on the money plus a 10 percent penalty.

Johnson said the average investor should take a look at how their money is allocated in their retirement fund.

“If you’re 80 percent in stocks, that’s too aggressive,” he said. “I would not be 100 percent in cash: That would be a mistake over the long-term.”

He said the looming crisis isn’t the same as the recession in October 2008, when the market plunged 777 points in one day after congressional refusal to bail out the nation’s largest banks.

“After an initial decrease from the recession, the markets recovered over time,” Johnson said. “Since March 2008 to today, the Standard & Poor’s 500 index is up 104 percent.”

Johnson dismissed the notion that baby boomers nearing retirement consider switching to an all-cash position because they don’t have time to recoup losses.

He said once you get out, it’s hard to time it right to get back in.

“If you are a 60-year-old and want to retire in five years, the reality is you have time to recoup any losses. You have to make the money last through your retirement. You could cash out and put the money under your mattress … but that would be a mistake.”

The Associated Press contributed to this report. Contact reporter Chris Sieroty at sieroty@reviewjournal.com or 702-477-3893.

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