New York and Atlanta – Emergency interest-rate cuts. A presidential speech meant to calm the financial markets. New government authority to buy from financial institutions as much as $700 billion worth of bad mortgage-related debt – all designed to reopen the world's clogged credit markets.
But Wall Street, gripped by a negative and increasingly entrenched psychology, is so far is shrugging off most of these herculean rescue efforts. After the worst week in the history of the stock market – with the Standard & Poor's 500 down 18.19 percent for the week – what will it take to make the sellers of stocks into confident buyers again?
It’s not a new question. In almost every severe market downturn, investors at some point see only the gloom and doom. Here’s what ultimately dispelled previous dark clouds:
•In August 1982, the Federal Reserve abruptly reversed course and began cutting interest rates. It sparked a bull market that sent S&P 500 stocks soaring 229 percent over five years.
•Immediately after the crash of October 1987, then-Fed Chairman Alan Greenspan threw money at the banking system, resulting in a bull market that pushed stocks up 65 percent over 2-1/2 years.
•In 1990, following a run-up in oil prices and a recession, the Federal Reserve cut interest rates and the S&P 500 jumped 417 percent over the next 9-1/2 years.
•By March 2003, after the bursting of the dotcom bubble, the excesses were finally wrung out of the markets. The resulting market increase ran until 2007, and stocks climbed 101 percent.
What will it take now?
Time, primarily, say some stock market strategists. That’s the view of Sam Stovall of Standard & Poor’s in New York, who notes that the $700 billion bank rescue plan won’t actually be implemented for about another month. “People expect it to be working already,” he says. “It’s like if I plan on losing weight and I joined a health club that won’t be open in November, and people are upset that I haven’t lost weight yet.”
Next week might still be a little dark, Mr. Stovall worries, because many investors will get their brokerage statements over the weekend. “We could have one last wringing of the towel,” he says.
It also might take yet more government action, says Fred Dickson, chief market strategist at D.A. Davidson in Lake Oswego, Ore. He would like to see the Federal Deposit Insurance Corp. guarantee all deposits at all banks. Corporate treasurers and big investors are withdrawing their funds from banks to protect their assets, he says. “There must be a flow of funds back to the banks,” he says. “We need a big enough stick to turn around confidence in the banking system.”
This weekend, when finance ministers from the G-7 industrialized nations meet in Washington, presents an opportunity to reassure the public that there will be no more bank failures, says Bill Stone, chief investment strategist at PNC Financial in Philadelphia. “If they say, 'If you are otherwise solvent, we will guarantee your bonds,' that would help,” he says. “Right now there is so much negative outlook, any positive news can be the catalyst.”
Most investors just want the wild stock-market ride of the past two weeks to be over, and professional money managers usually warn them against trying to pick the bottom in bear markets.
One is Bob Markman of Markman Capital Management in Edina, Minn., who does not expect the markets to turn around until people give up in despair. He counsels that there's no need to rush back in. “When the market turns around, it typically rises 30 to 50 percent, so who cares about missing the first dozen percent,” he says. “You should start buying when things start moving up, not down.”
Investors on Main Street, however, cite other actions that would begin to restore their confidence that the economy will pull through this crisis. Bob Indech of Norcross, Ga., an engineer, would like to see Congress permit the US government to loan money directly to the 4 million or so Americans in danger of foreclosure. The free-falling housing market, he says, has wrecked the ability of financial institutions holding mortgage-related securities to accurately "mark to market" the value of those assets, forcing them to sit on their cash reserves and cinch in lending lines.
Bailing out homeowners directly would not necessarily appease Wall Street, says Mr. Indech, who estimates he has lost about 20 percent of the paper value of his own investment portfolio in the past month. But it would address the fundamental problem of the crisis in a way that the existing rescue plan has not. He estimates it would also be a cheaper solution, costing perhaps $35 billion.
“You can’t have a trickle-down philosophy for a crisis problem. It doesn’t work,” says Indech. “You don’t pay [banks] to influence their behavior in the hopes that they will then behave in the way you want them to behave. The problem is not Wall Street, it’s Main Street. It’s simple, but people who live in ivory towers and have million-dollar salaries just don’t see the problems of the poor people on Main Street. It’s not in their understanding.”
To some others, it doesn't help that all this financial uncertainty is coinciding with political uncertainty over who will be the next US president. That’s the view of former investment banker Mark Small, now an information technology director at an Atlanta firm. He estimates he’s lost at least 25 percent of his stock value in the past week.
Mr. Small says Sen. Barack Obama’s widening lead in national polls over presidential contender Sen. John McCain has sent a signal to investors that change is coming – to wit, that Democrats are likely to control both Congress and the White House.
“Whenever there’s a political change in Washington, you see people start pulling their money out,” says Small. “The bottom line is people aren’t sure where [the next administration] is going to take us.”
Some of Small’s investor friends are now urging him to buy up stocks at bargain-basement prices, but he so far hasn’t moved. Buttressing the Wall Street meltdown are job concerns, he says.
“There’s a real fear out there that they’ll come in and say, ‘We’re eliminating your department,’ and then you’re out of a job,” says Small. “That makes betting on stocks riskier, since you may be in a situation where you need the money, and now you suddenly have a lot less money if you need to take it out of the market.”