Matt Fecteau: Oil Prices Alone Are Not Killing Your 401(k)
Thursday, January 21, 2016
First, China is a large part of the problem. China, a country that is very much intertwined with the US economy, is seeing the slowest growth in 25 years. The growth rate for China is 6.9% compared to 7.3% a year earlier. This is having the most significant adverse impacts on the US economy. If growth slows down in China, currently the United States’ number one trading partner (Canada was the previous year), expect the stock market index as a whole to suffer and your 401k as well because investors are selling.
Second, another part of the problem, the Federal Reserve will likely increase interest rates in the future. While the Federal Reserve only increased interest rates slightly in December 25 basis points (.25%), a further increase in interest rates is expected in March. When interest rates increase, this compels people to save more instead of consuming (buying stuff); thus, growth will likely slow in the American markets; investors are seeing this and making a decision now to sell, driving down the price of stocks and your respective 401k.
Third, as for the aforementioned glut of oil. Is it really a surprise your 401k is tanking partly because of the exponential increase in the supply of oil? The instability caused by the Iran-Saudi Arabia conflict is fueling some of the contractions in the stock market. While war has not broken out between the two oil rich states, a price war could break out, and perhaps already is here. The IAEA, international atomic watchdog, has declared Iran has kept its word, and sanctions are being relaxed. With the international world easing sanctions on Iran, we can expect oil prices to continue to tumble as Iran increases the oil exports from one million barrels a day to four million barrels a day.
Also, adding fuel to fire (no pun intended), the United States has become the number one exporter of natural gas, and crude oil globally because of technology such as hydrofracking. Congress lifted the 40 year ban on oil exports increasing competition and supply, driving oil and gas prices down even further, causing oil and gas conglomerates’ bottom line to suffer, or at least the investors expect it to suffer, causing them to sell, again driving down the share price.
Oil by itself has little to do with the substantial contraction in your 401k. There are a number of reasons, and low oil prices have had a beneficial impact on other industries such as the airline industry (fuel was once its number one cost, but now it is labor). However, because oil and gas conglomerates are important S&P 500 placeholders, a decline in the price of oil and gas prices will likely hurt your 401k which by design, likely tracks the index.
As far as the other contractions, they are likely due to the slowing of the Chinese economy, the foreseeable interest rate hike, and partly, the aforementioned tumbling price of oil. Yet more importantly, investors’ future growth expectations play the most critical part; the market is down because investors are selling in mass. While oil and gas conglomerates remain profitable even with crude dropping to $28 a barrel, investors expect the future earnings will not meet their expectations.
You are looking at a perfect storm of bad news causing a decline in your 401k, not just mere oil. Just because firms are profitable, that means little to investors whom want to see continuous and expansive growth. Investors are overacting to the bad news in the market; this overreaction can be profitable if you jump in at the right time such as now.
Related Slideshow: Timeline - Rhode Island Pension Reform
GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.
Governor Don Carcieri makes pension reform a top priority in his emergency budget plan. His three-point plan included:
1. An established minimum retirment age of 59 for all state and municipal employees.
2. Elimination of cost-of-living increases.
3. Conversion of new hires into a 401(k) style plan.
See WPRI's coverage of Carcieri's proposal here.
Rhode Island's state administered public employee pension system only held 48% of the assets to cover future payments to its emplyees.
"This system as designed today is fundamentally unsustainable, and it is in your best interest to fix it" - Gina Raimondo
Check out Wall Street Journal's coverage here.
Gina Raimondo defeats opponent Kernan King in the election for General Treasurer of Rhode Island using her platform to reform the structure of Rhode Island's public employee pension system. She received 201,625 votes, more than any other politician on the 2010 Rhode Island ballot.
Raimondo leads effort to reduce the state’s assumed rate of return on pension investments from 8.25 to 7.5%.
Her proposal includes plans to suspend the Cost of Living Adjustment (which allows for raises corresponding with rates of inflation for retirees), changing the retirement age to match Social Security ages, and adding a defined contribution plan.
Raimondo releases “Truth in Numbers”, a report detailing the pension crisis and offering possible solutions. She continues to work to raise public support for her proposal.
"Decades of ignoring actuarial assumptions led to lower taxpayer & employee contributions being made into the system." - Gina Raimondo (Truth in Numbers)
Read GoLocalProv's analysis of the report here.
Read the Truth in Numbers report here.
Governor Lincoln Chafee and General Treasurer Gina Raimondo present their pension reform legislation proposal before a joint session of the General Assembly.
“Our fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer…I join the General Treasurer in urging the General Assembly to take decisive action and adopt these reforms.”- Gov. Lincoln Chafee
Head of Rhode Island firefighters’ union accuses Raimondo of “cooking the books” to create a pension problem where one did not exist. Paul Valletta Jr. states that Raimondo raised Rhode Islanders’ assumed mortality rate to increase liability to the state, using data from 1994 instead of updated information from 2008, and lowered the anticipated rate of return on state investments.
“You’re going after the retirees! In this economic time, how could you possibly take a pension away?” Paul Valletta Jr (Head of RI Firefighters' Union)
Read more from the firefighters' battle with Raimondo here.
Check out the New York Times' take on RI's pension crisis here.
November 17, 2011
The Rhode Island Retirement Security Act (RIRSA) is enacted by the General Assembly with bipartisan support in both chambers. RIRSA’s passing is slated to reduce the unfunded liability of RI’s pension system and increase its funding status by $3 billion and 60% respectively, level contributions to the pension system by taxpayers, save municipalities $100 million through lessened contributions to teacher and MERS pension systems, and lower the cost of borrowing.
Read more from GoLocalProv here.
November 18, 2011
Governor Lincoln Chafee signs RIRSA into law. According to a December 2011 Brown University poll, 60% of Rhode Island residents support the reform. Following its enactment, Raimondo holds regional sessions to educate public employees on the effects of the legislation on their retirement benefits.
Read about how Rhode Islanders react to RIRSA here.
Raimondo hosts local workshops to explain the pension reforms across Rhode Island. She also receives national attention for her contributions to the state’s pension reforms. The reforms are given praise and many believe Rhode Island will serve as a template for other States’ future pension reforms.
Read about the pension workshop here.
Read Raimondo's feature in Institutional Investor here.
March - April 2012
Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.
December 5, 2012
Raimondo publicly opposes Governor Chafee’s meetings with union leaders in an effort to avoid judicial rulings on the pension reform package. In response, Chafee issues a statement supporting the negotiations.
Read more about Raimondo's opposition here.
Read about Chafee's statement http://www.golocalprov.com/news/new-chafee-issues-statement-supporting-pension-negotiations/">here.
Led by the Rhode Island State Association of Fire Fighters, unions protest the 2011 pension reform outside of the Omni Providence where Governor Lincoln Chafee and General Treasurer Gina Raimondo conduct a national conference of bond investors.
Read about Raimondo's discussion of distressed municipalities here.
The pension plan comes under increased scrutiny as a result of the involvement of hedge funds and private equity firms. Reports show that $200 million of the state pension fund was lost in 2012.
"In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab." - Ted Seidle (Forbes)
Read GoLocalProv's coverage of the State Pension Fund's losses here.
Read Ted Seidle's criticism of Raimondo in Forbes.
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