Personal Finance Blog By MoneyRates

Yesterday the Dow Jones Industrial Average suffered its worst day of 2012 so far. Ordinarily, that news wouldn't affect depositors in savings accounts, or might even reaffirm their conservative choice of investment. This time though, it represented yet another setback for savings accounts and other deposit vehicles.

The problem in this case was that the tumbling stock market dragged interest rates down with it. Any decline in market interest rates is another sign that depositors could have an even longer wait before they see higher CD, savings and money market rates.

What ails the market

The Dow fell 203.66 points yesterday, representing a 1.6 percent loss in a single day. This was the first loss of this magnitude since just before Thanksgiving. Along with stocks, 10-year Treasury bonds dropped by 6 basis points in one day, for a total drop of 9 basis points in three trading days. Think of the bond market as a barometer for interest rate trends that will ultimately affect savings accounts, and as such these recent events mean the outlook is worsening.

Once again, the Greek financial crisis raised its ugly head. There are essentially two types of fears associated with that crisis. Or, to put it differently, you can pick which poison you fear more -- the quick-acting one or the slow-acting one:

1. The quick-acting poison is that a disorderly default by Greece, because of failure to reach a settlement agreement with bondholders, would trigger a series of defaults by financial institutions that found themselves suddenly caught short of liquidity. Basically, it would be back to the brink as in 2008, only with central banks already having exhausted some of their options for dealing with such a crisis.
2. The slow-acting poison is the scenario in which Greek debt is unwound in an orderly manner, but austerity measures by Greece and other distressed European nations cause a sharp drop-off in demand from that continent, slowing global economic activity.

In the case of yesterday's sell-off, it was fear of the quick-acting poison that gripped the stock market. Neither is an attractive proposition, but at least with the slow-acting poison there would be more of a chance for other factors to counteract the damage.

A partial cure

Both the stock market and the bond market have fallen into a pattern lately in which they react optimistically when the focus is on developments here in the U.S., and pessimistically when foreign issues come to the fore. There will be an opportunity to re-focus on the optimistic side of the ledger this Friday when February employment numbers will be released -- if those numbers can follow through on the improvement of recent months.

Still, this will only be a partial cure. A strengthening U.S. economy would help counter the slow-acting poison of slowing European demand, but it would be powerless against the quick-acting poison of a global financial crisis.

Recently, MoneyRates.com, in conjunction with GetRichSlowly.org and MSN Money, conducted a poll asking people how they prepare their tax returns. The results suggest that MoneyRates.com readers may take a more independent approach than the broader population.

The poll was connected to an extensive GetRichSlowly.org study of tax preparation options and their costs. Overall, the results found that 49 percent of respondents pay someone to do their tax returns, while a similar number, 48 percent, handle the returns themselves, either by hand or with the help of tax software. However, isolating the results from MoneyRates.com and GetRichSlowly.org tells a slightly different story.

Combined, 66 percent of the respondents to these two sites reported preparing their own tax returns, compared to the 49 percent from the overall poll. This means that far fewer respondents to MSN Money prepare their own tax returns.

Why the difference? It's hard to say for sure, but discussing some of the possible reasons helps illustrate what goes into the decision of preparing your own return or paying a professional to do it. Here are three possibilities:

1. The MoneyRates/GetRichSlowly audiences may be more do-it-yourself oriented. All three of the websites are related to personal finance, but MoneyRates.com and GetRichSlowly.org have more emphasis on do-it-yourself content. In the case of MoneyRates.com, it may be where to find the best CD rates, what trends are affecting savings accounts, or how to avoid checking account fees. With GetRichSlowly.org, you are likely to find practical advice on changing your spending habits and building savings over time. Either way, this hands-on approach may be reflected in the way visitors to these sites tackle their taxes.
2. MSN Money audience members may have more complex tax situations. On the other hand, MSN Money carries more coverage of global financial markets, and people with investments of that nature may have more complex tax situations. That might explain why these poll respondents were less likely to do their own taxes.
3. The MoneyRates/GetRichSlowly audience may be keeping a close eye on what affects their taxes. If you put the above two theories together, a third possibility emerges: The audience for MoneyRates.com and GetRichSlowly.org may be more likely to handle their own investments, while the MSN Money audience might be more likely to employ financial advisors. The link between this and tax preparation is that when managing investments, it is useful to know what drives tax liability, and handling your own tax returns will give you an in-depth feel for this. Not that tax considerations should drive your investment approach -- after all, better to pay the tax on a large gain than to have no gain at all -- but they should inform that approach.

The contrast in the results is interesting, but no matter how you approach your taxes, the important thing is to get them right. The article on GetRichSlowly.org has some tips and information that can help you decide which approach is right for you.

Media outlets love nice, round numbers. So when the Dow Jones Industrial Average recently closed above 13,000 for the first time since 2008, there was quite a bit of fanfare in the press. The truth is, though, this type of landmark number is usually more hype than a significant measure of market conditions.

Un-curbed enthusiasm

After the Dow closed above 13,000, the Associated Press quoted one institutional investor as gushing that it was "a momentous day for investor confidence," and that the Dow regaining its 2008 level implied "that the financial crisis that we were all losing sleep over, it never happened, because now we're back."

Really? It's as if the financial crisis never happened?

Tell that to the people who are still out of work. Tell that to people whose retirement programs are way behind schedule because of all those years without net gains in the stock market. Tell that to people whose incomes have been crushed by low interest rates on savings accounts.

Three truths about 13,000

The Dow reaching 13,000 really doesn't qualify as "a momentous day." Here are three truths to put this landmark in perspective.

1. Prices mean less than valuations. The level of the Dow Jones Industrial Average is determined by a collection of prices, and prices alone tell you very little about the condition of stocks. You need to know the valuation of stocks, which is how those prices compare to underlying fundamentals such as earnings, earnings growth rate, net asset value, cash flow, etc. All things considered, it is better for fundamentals to be improving than for prices to simply be higher.
2. Nearly four years of dead money is nothing to celebrate. Most retirement savings plans are based on assumptions about stock market growth and interest rates. After the stock market has take years to simply retrace its steps, and with interest rates on savings accounts down near zero, those assumptions have been severely disappointed. This means retirement savings still need to dig out of a hole.
3. Psychological barriers are all in the mind. Fundamentally, professional investors know that crossing 13,000 is no more significant than crossing 12,631 or 13,029, but they justify the hype by calling the round numbers a psychological barrier. That little game is all in the mind. The reality is, prices have no problem at all crashing through those supposed barriers on the way up during a rally, or on the way down during a panic.

So pop a champagne cork if you want, but only if you're in the mood for champagne. If you are looking to celebrate true progress, look for another sign of good news on the employment front, or any sign of good news from Europe, or perhaps an ease back in oil prices. Those things will tell you more about where the market is going than where it has already been.

Agreement on a $172 billion aid package for Greece bought only a mixed reaction from the financial markets. While it might seem that this was the resolution of a threat that has been hanging over the financial world, the markets recognize that this is just the end of a chapter, not the conclusion of the whole story.

One of the challenges of following the economy is that negative shocks can develop quickly, but resolutions tend to play out slowly. So, the European debt saga still has more twists and turns ahead of it, and could have an effect on a number of aspects of U.S. finances:

1. The US economy. Rising employment numbers are probably the best indicator that the U.S. economy is building momentum, but that economy does not operate in a vacuum. Financial system shocks in Europe could start to freeze up capital here in the U.S. -- an important setback after the Federal Reserve has made increasing liquidity such an area of emphasis in recent years. More fundamentally, slower growth in Europe could affect U.S. exports. At the very least, it doesn't appear Europe as a whole can be counted on as a source of demand growth in the near future. In terms of economic recovery then, the U.S. may have to go it alone -- perhaps with help from Asia.
2. The U.S. stock market. The U.S. stock market has had a strong rally in recent months, and in many cases prices seem to be responding to improving fundamentals. However, the potential for Europe to be an economic drag could slow that improvement in general. In particular, companies that are heavy exporters (especially to Europe) and large financial companies could be vulnerable to earnings disappointments.
3. U.S. interest rates. One of two things -- and preferably both -- has to happen in order for rates on savings accounts, money market accounts, and other deposits to start to climb back up from near zero. One is that the U.S. economy has to improve enough for the Federal Reserve to have sufficient confidence to start to raise short-term interest rates, though based on the Fed's extraordinary commitment to low rates, it appears they will err overwhelmingly on the side of caution before letting rates rise. Therefore, the more likely possibility in the near term is that economic activity in the U.S. could pick up enough to raise loan demand. This will make banks hungry for more working capital, and raising savings and money market rates would represent a mild form of bidding war for that capital. As noted above, though, the situation in Europe still could weigh on the U.S. economy, and thus hold back savings and money market rates a little longer.

The European debt crisis is a complicated situation that took years to develop. It is going to take more than one agreement to set it right.

With the payroll tax deal, Democrats and Republicans finally found some common ground -- namely, that they are both willing to pander in an election year.

A joint committee of the Senate and House of Representatives last week reached an agreement in principle on a measure that would extend both a payroll tax break and unemployment benefits. This agreement still needs to be voted on by the full House and Senate, but if passed it should be popular because it will keep money flowing to tens of millions of Americans. The price will be paid in the future -- and the future is a constituency which has little voice in the immediacy of an election year.

Feel-good measures

The proposed agreement would keep unemployment benefits extended far beyond their normal 26 weeks, and continue a $100 billion partial suspension of payroll taxes that pay for Social Security benefits. There is generally a tendency to pass feel-good measures in an election year, and politicians would be very reluctant to do anything that might impede a fragile economic recovery. While preserving that recovery is a legitimate concern, neither extending unemployment benefits or continuing the payroll tax break should be viewed as an untarnished victory:

• The move to extend unemployment benefit comes at a time when job growth is improving. It targets special relief for high unemployment states, but given the disparity of unemployment rates among states, shouldn't people be encouraged to move to where the jobs are?
• While people may love the payroll tax break, they shouldn't forget that the tax was there for a reason. They may find out what that reason was when their Social Security checks come up short somewhere down the line.

Feel-good measures may be inevitable in an election year, but in this case they raise the question of when the economy will be deemed healthy enough to be weaned off its stimulus dependency.

Stimulus dependency

The payroll tax break and extension of unemployment benefits were originally positioned as temporary measures to get the economy through a rough patch. Now, a series of rolling extensions have demonstrated that even temporary measures can be difficult to discontinue.

The same is true of low interest rates. Though the argument can be made that low interest rates on savings accounts and other income-generating vehicles has taken money out of the economy, the Federal Reserve has not only stuck to its low interest rate stance, but has made a multi-year commitment to it.

It's difficult to foresee when politicians and policy makers will have enough confidence to unwind the artificial stimuli that have been built into this economy. Again, those who will pay the price someday -- such as future Social Security recipients -- will generally have their voices drowned out in the present. It may be up to a constituency of those hurt by artificially-low interest rates - people with savings accounts, money market accounts and CDs -- to start to put some pressure on Washington.