Investor Fear Remains Deep Despite 1-Day Rally

Since the Nov. 4 election, investors have been abandoning stocks in a kind of slow-motion crash that experts say underlines just how anxious they are about what is likely to be a long and deep recession.

Even after a late-day rally on Friday, the benchmark Standard & Poor's 500 index has plunged 20 percent since the election. That more than wiped out the index's 18 percent gain in the six trading days ahead of the balloting as optimism grew that Barack Obama would be elected president.

Analysts aren't blaming Obama specifically for the postelection hangover. Rather, they peg it to growing fears that the Bush Administration and Congress are fumbling the $700 billion bailout plan and the weakened economy's impact on financial stocks — highlighted by the plunge in shares of Citigroup Inc. to below $4 a share.

"You can almost hear people yelling, 'Get me out at any price,' " said Al Goodman, chief market strategist at Wachovia Securities. "It's the highest level of fear and depression in my 45 years as a student of the market."

Market experts define a crash as a decline of 20 percent over a single day or several days. Over seven trading days that ended Oct. 9, the Dow lost 22 percent.

This month, the S&P 500 skidded more than 25 percent in the 12 trading days after the election before a bounceback on Friday narrowed the loss to 20 percent.

All told, stocks have lost a stunning $2.6 trillion since Nov. 4, as measured by the Dow Jones Wilshire 5000 index, which reflects the value of nearly all U.S. stocks.

The Friday afternoon news that Obama is likely to choose Timothy Geithner, the president of the New York Federal Reserve, to be the next Treasury secretary helped spark a rally that sent the Dow Jones industrial average surging almost 500 points.

Geithner has worked closely with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke this year as the government seized control of mortgage giants Fannie Mae and Freddie Mac and insurer American International Group Inc.

But analysts say it would be a mistake to say Friday's market reversal marks an end to the carnage that has wiped out 45.8 percent of the value of the S&P 500 index since the start of the year.

"I don't think anyone can say we've reached the bottom yet," said Chuck Gabriel, managing director of Capital Alpha Partners in Washington. "It's going to be a very gloomy Christmas."

Kim Caughey, equity research analyst at Fort Pitt Capital Group in Pittsburgh, said that "for investors to get more confidence, we need to know details" of the new administration's plans to handle the crisis.

"There's been a vacuum of leadership" she added, "and when that happens, you get fear and rumors, and then people sell."

Obama on Saturday outlined his plan to create 2.5 million jobs by January 2011 to rebuild roads and bridges and modernize schools while developing alternative energy sources and more efficient cars.

"These aren't just steps to pull ourselves out of this immediate crisis; these are the long-term investments in our economic future that have been ignored for far too long," Obama said in the weekly Democratic radio address.

His goal is to get the plan quickly through Congress, with help from both parties, after Obama takes office Jan. 20.

The government reported last week that new claims for jobless benefits rose to a 16-year high. And while prices for gasoline and other consumer goods are falling, that's raising fears that a deflationary environment would further zap spending and corporate profits.

The market's inability to turn around also has fed criticism of the government's handling of the crisis.

Since being rolled out a month ago, the Treasury Department-administered bailout has undergone two major revisions. One was its abandonment of the original plan to buy banks' toxic assets. The second was its decision to let the Obama administration decide how to spend the second half of the $700 billion.

"It doesn't instill confidence; it erodes it," Joe Battipaglia, market strategist at Stifel Nicolaus, said of the shifts in course.

"The perception on Wall Street is that Washington is rudderless," he added. "There's no leadership on the pressing issues of the day ... and time is running out."

Anxiety about the rescue plan has punished shares of the nation's biggest banks, which received $125 billion in government capital injections under the rescue plan. Shares of financial service companies on the S&P 500 have fallen 41 percent since the election and 23 percent in the past week.

None have suffered like Citigroup. The global banking titan's shares slid a combined 55 percent Thursday and Friday and ended the week at $3.77 on fears that it will have to take even bigger charges for loan losses. The stock traded as high as $35.29 last December.

Citigroup's fall despite taking billions in bailout dollars "has really scared the market," said John Lynch, chief market analyst at Evergreen Investments. "The government is throwing everything at (the crisis), and yet Citi is still under $5. That's an alarm."

Also rattling investors have been troubled congressional talks on whether the government should bail out the Detroit automakers. The failure to get a deal done upset markets earlier in the week and could further threaten the stock market if left dangling.

"The market wants this stuff resolved," said Jack A. Ablin, chief investment officer at Harris Private Bank in Chicago.

Some investors have seized on the auto industry tumult as a sign of the perils facing the economy — prompting them to pull money out of the market.

"Individual investors have remained pretty cool throughout most of this downturn .... but I am starting to hear from clients saying basically, 'We're already down this much. Should we throw in the towel' " and sell everything?

"Most of them are in good shape, but the erosion of dollars and cents does impact their psychology," he said.

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  • by Devil Dog Location: New Bern on Nov 23, 2008 at 07:45 AM
    People finally figured it out.They can't live with a champaign appetite on a beer pocketbook. GREED and personal IRRESPONSIBILITY finally caught up with the masses after 15 years of ignorance. The problem festered in the CLINTON era, and now his cronies are back in high positions to figure it out. People better start paying attention to our nations CONGRESS because their are the idiots who LEGISLATE. This country is about $57 trillion dollars in debt, which means about $300 thousand per household. Our children and grandchildren won't pay this debt off. At least they can blame their parents. 71% of our citizens can't pass a basic civics test. The problem is our "nitwits" in Congress have a 75% failure rate. This is laughable!!!
  • by Mike Location: Edenton on Nov 23, 2008 at 04:08 AM
    I can understand apprehesion with so many jobs being lost but the WORST thing anyone can do is pull their money out of the market unless you need it to pay bills. Think about it. You are selling for half or less of what you paid for investments supposed to make money for you. Now is the time to BUY while stocks are priced low! Make no mistake. The US economy will recover. Those who can afford to spend a little extra on investments stand to do very well. It's that defeatist attitude that is bringing the whole country down. What are you doing? Stuffing your matresses? Investment provides businesses capital to create jobs. Are YOU doing your part in bolstering your country?!

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