As Mike Tyson once put it: “Everyone has a plan until they’re hit in the face.”
Well, investors certainly took one on the chin Thursday, with the stock market falling 513 points – off 4.31%, as measured by the Dow Jones Industrial Average.
Where to start? Well, you don’t need a hot tub time machine to clarify one undeniable point – investors don’t like uncertainty. They didn’t like it in December 2008 — the last time the stock market fell this sharply — and they don’t like it in August 2011.
And right now, uncertainty — or, more accurately, fear — is the watchword in the financial markets, as investors flee the stock market for safe havens like U.S. Treasuries and money markets. The one-month Treasury Bill in fact slipped into negative territory briefly on Thursday, meaning investors not only demanded no interest but were effectively willing to pay a small fee to have their funds held in relative safety.
But better to lose a little than lose it all, so the stampede to cash continued unabated during Thursday’s trading session. Early indicators for Asia and European trading on Friday morning indicates the carnage should continue.
Here are some other key takeaways from Thursday’s market collapse.
- The Dow Jones Industrial Average has lost more than 1,300 points, or 10.5 percent in the past two weeks. That’s approximately $1.9 trillion in market value that’s vanished. Ironically, it’s almost the same number as the $2 trillion spending cuts that were agreed to in last week’s debt ceiling deal in Washington.
- Investors have turned their gaze from Washington to Wall Street, and they’re horrified by what they see. A battery of lousy economic numbers – including this morning’s unemployment number, which analysts expect to still be weak – has fed a massive rush for the exits. It’s “a perfect storm of selling,” said Ryan Larson, head of U.S. equity trading for RBC Global Asset Management.
- Despite the collapse, stock market gurus aren’t telling investors to “get out now.” CNBC’s Jim Cramer told viewers on Mad Money last night that “panic is not a strategy.” Cramer says he’s only told investors to sell the market three times – in 1987, 1998 (before the dot.com technology stock crash), and 2008 (at the height of the banking crisis). But 2011 isn’t one of those times, he says. Even though the stock market may not have hit bottom, it’s too risky to sell and miss the inevitable market rebound, Cramer told viewers — a message supported by TIME Moneyland’s own “Mind Over Money” contributors.
- Investors clearly aren’t pacified by last week’s debt ceiling agreement in Washington. PIMCO managing director William Gross noted Thursday that global investors view the U.S. as something of a “banana republic” these days, and that even with the debt deal, the U.S.’s debt picture appears almost insurmountable. Writes Gross, “In addition to an existing nearly $10 trillion of outstanding Treasury debt, the U.S. has a near unfathomable $66 trillion of future liabilities at “net present cost.” That’s basically Wall Street jargon for money that Uncle Sam has promised out, but doesn’t have money to pay.
- Stock market panics don’t end overnight. It’s tough to stomach the thought of a three-month panic attack, but that could be what the financial markets are looking at right now. Mark Hulbert, founder of the Hulbert Financial Digest, and one of the “go-to” guys in perilous market environments, points out that recent history indicates a slow slide to the bottom – maybe even 90 days from now. In contrast with Cramer, Hulbert says that the market bottom following the October 19, 1987, crash didn’t occur until December 4, 1998 – six weeks later. And the November 2008 crash didn’t officially reach the floor until March 9, 2009, roughly 110 days later. As bad as Thursday, according to Hulbert, we still have a ways to go.
A scan of stock market guru opinions last night reveals the following: Yes, these are uncertain, even scary times. But there are too many good companies out there, making money, paying dividends, and offering real value to investors to substantiate any talk of panic.
The trick is not just finding them, but finding the courage to want to find them.
And that’s no mean feat in this market environment.