Taxing bodies also nervous about the market

Tuesday's unprecedented, unexpected rate cut by the Federal Reserve had everyone with a 401K checking his or her portfolio.

The move also had local taxing bodies -- and those who manage the money for local schools, cities and park districts -- checking their investment outlook.

"It's a concern, obviously, with the rates dropping the way they have," State Treasurer Alexi Giannoulias said Tuesday.

Giannoulias' office manages the Illinois Funds, which hold about $6.75 billion from more than 2,100 local units of government. By law, the funds must maintain mostly short-term investments, which are more susceptible to market and interest rate fluctuations.

"I think returns aren't going to be as high as last year or the year before," Giannoulias said.

Local school officials expressed similar concerns Tuesday.

Naperville Unit District 203, for example, makes about $3.6 million annually in interest on investments -- but not if interest rates plummet, Assistant Superintendent for Finance David Zagar said.

"Of course, that's going to wildly fluctuate with interest rates," Zagar said. "If interest rates are cut in half, that's (the $3.6 million) cut in half."

On the other side of the coin, interest rate cuts could eventually decrease borrowing costs for schools that sell bonds to pay for construction.

District 203 has asked voters to approve a $43 million building bond sale in February.

"At this point … I'm not guessing there will be a real big impact on those," Zagar said, explaining that the recent rate cuts won't immediately affect long-term borrowing rates.

Neither will Tuesday's market events affect the $42 billion Teacher Retirement System of Illinois, a spokeswoman said.

"We're looking at three-year returns, five-year returns, 10-year returns," said TRS public information officer Eva Goltermann. "We weather ups and downs by diversifying and looking at long-term performance."

Tuesday's rate decrease and market movement will clearly affect portfolios, economists said, but it might not have the same effect on pocketbooks.

"I think Wall Street is a lot more negative than Main Street," said Alexander Paris Sr., chief economist for Barrington Asset Management. "I don't think things are that bad."

Paris noted that President Bush's proposed economic stimulus plan, which includes tax rebates for individuals and businesses, could soon put money back in the hands of consumers.

That's good short-term news for suburban consumers -- and some retailers -- Paris said.

"If you get a $500 check in the mail … you're not going to buy a house or a car," Paris said. "You're going to go to Charlotte Russe or Chicos and buy some clothes, and those kind of retail stocks were strong today. They were even up when the market was down at its worst."

Of course, economic downturns and interest rate drops hit different people differently. The impact of a recession, or near recession, depends on whether you're rich or poor, retired or working, a borrower or a lender, a plasma TV retailer or a grocery store owner.

"Typically, the sectors that hold up better are the defensive sectors, meaning your foods, your beverages, your health care, your drugs, your toiletries, the basic necessities of life," said David Klein, senior vice president of RBC Dain Rauscher Inc.

"Even in an economy slowdown, people are going to buy the necessities," Klein said, naming Altria Group Inc. and Proctor and Gamble as companies that sell such items.

But some stocks, such as Altria, defied that conventional wisdom Tuesday -- perhaps more evidence that Main Street and Wall Street aren't on the same page.

"That a tobacco stock was down over 5 percent today suggested to me that (the market volatility) was overdone, because the slowdown is not going to stop people from smoking," said Jack Ablin, chief investment officer for Harris Private Bank.

"The market threw the baby out with the bath water," he said.

Some economists expressed hope Tuesday that the economy would rally in the second half of the year, rendering recent hand-wringing moot.

"Most economists today feel that the second half of this year will be better than the first half of the year," Klein said.