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'Extreme fear' of widening crisis drives Wall Street's nosedive
(Wisconsin State Journal, The Via Acquire Media NewsEdge) Oct. 7--"Extreme fear" is what prompted Monday's stock market acrobatics, said Bruce Bittles, chief investment strategist for the Milwaukee investment firm Robert W. Baird & Co.
Even after the House passed an amended version of the $700 billion bailout bill last Friday, the Dow Jones industrial average still closed down more than 150 points on Friday. "It was very disappointing for investors to see that happen on supposedly good news," Bittles said.
Over the weekend, several European banks announced their own financial crises, resulting in drops in European stock exchanges that also helped precipitate Monday's response on Wall Street, he said.
"I think people finally began to get panicked about how much of their accounts could be in jeopardy," said Bittles, in Nashville, Tenn.
The Dow fell more than 800 points Monday, its biggest drop ever, before closing down about 370 points at 9,955.50. It was the first time in four years the Dow finished below 10,000.
Finance professor Mark Ready at the UW-Madison School of Business agreed that part of Monday's decline resulted from problems in Europe. "The global economy is starting to look weaker than everyone had anticipated," said Ready, academic director of the university's Stephen L. Hawk Center for Applied Security Analysis.
"Some of the European institutions bought securities backed by U.S. mortgages, but there also have been declines in European housing markets," Ready said.
Don Nichols, UW-Madison professor emeritus of economics and public affairs, said much of the fear revolves around the liquidity position of banks, and that has not yet been solved. Even with passage of the bailout plan, it will take time to assess which of the mortgage-backed securities the banks invested in are worth buying.
"The Treasury Department is only going to buy the good ones, not dump taxpayer money on losers," Nichols said. "It's going to take time to determine which have intrinsic value. So we're in sort of a holding pattern."
In addition, since Congress approved the bailout package, the conversation has shifted to whether it is soon enough and big enough to handle the problem, said Bill McCorkle, large cap portfolio manager for the State of Wisconsin Investment Board.
McCorkle said fear of a global recession is another factor playing into the situation. If the U.S. has a recession and Europe's economy is slowing, "will that pull down the emerging nations' economies as well?" he said.
So, after Monday's plunge, has the stock market hit bottom? There's just no way to know, said Bittles, but added that he thinks that low point is "very close" at hand.
Even so, he cautioned, the roller coaster probably isn't over. After the market bottoms out, it can drop once or twice more "to retest those lows."
Bittles said he's advising clients not to desert their equity holdings. "Typically, selling in a panic is the wrong thing to do," he said.
To see more of The Wisconsin State Journal, or to subscribe to the newspaper, go to http://www.wisconsinstatejournal.com.
Copyright (c) 2008, The Wisconsin State Journal
Distributed by McClatchy-Tribune Information Services.
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