The following is from Elizabeth Reidel in the New York office of the Stock Market Game:
Regardless of whether you voted for Barack Obama, his victory this week is truly historical. While the jubilation in the streets in many cities was comparable to New Year's Eve celebrations, Obama will inherit an economic mess when he enters the White House in late January.
Unemployment is front and center again this week as payrolls shrunk by 240,000 in October---bringing the total number of jobs lost in 2008 to 1.2 million. Despite the release of the unemployment data, Wall Street rallied today as investors took advantage of gains from a big sell off earlier in the week. Stocks plunged in the two sessions since Obama's victory with the Dow losing 929 points, its biggest two-day point decline ever, according to Dow Jones. The decline followed what some analysts consider to be a classic bear-market rally---an 18% surge on the S&P 500 in the seven trading sessions through the election.
The government also announced on Wednesday it will sell $55 billion in bonds next week as part of a massive borrowing to pay for its financial rescue programs. Borrowing is expected to reach a record $550 billion in the final three months of the year. Many analysts project the government will need to borrow an additional $368 billion in the first quarter of 2009. Clearly, things are bound to get a bit worse before we see the light at the end of the tunnel.
The Stock Market Game has recently added the trading of bonds to its program (only in certain states---so check with your coordinator to see if they are available). Your students (and perhaps some of you) may be interested in learning more about them as a possible investment strategy in this turbulent market.
Let's start with the basics---what are they? Bonds are loans you and other investors make to the issuers in return for the promise of being paid interest, usually but not always at a fixed rate, over the loan term. The issuer also promises to repay the loan principal at maturity, on time and in full. Bonds have a reputation as a dull investment, in part because they are less volatile than stocks and produce a lower long-term return than stocks. But in the current economy, they have become much more attractive as an investment option.
While all bonds share basic characteristics such as terms, rates, and par values (the face value, or named value of the bond---usually $1,000), they are not all alike. One of the major differences is that they're issued, or sold, by four distinct entities in the U.S. Corporations issue bonds to raise money for expansion, research and development, and other expenses of doing business. While corporations can also raise money by selling new stocks, they may prefer bonds because the existing stocks lose value when new stocks are issued. Municipal governments, such as states and cities, sell bonds to fund projects for the public good like building bridges, sewers, roads, and schools. The U.S. Treasury issues bonds to meet its regular and unusual obligations. And finally, government agencies issue bonds to raise money to do their work, such as provide mortgages as well as student loans.
As a general rule, bonds can help you weather downturns in the stock market, not only because they tend to fluctuate less in price than stocks, but also because they have the potential to provide regular income and strong total returns in periods when stocks are struggling. It seems like it's the perfect environment to start taking a closer look at bonds!
For more information about bonds, check out our What is a Bond? lesson in the Teacher Support Center . To access the lesson, click Lessons & Activities (in purple), search by keyword "bonds," and make sure to select "no" after "core."
