A Bad Day

I had planned to write a different article today but after the carnage yesterday, my plans changed. What can I say? It was an exceptionally bad day, coming near the end of a nasty month. There was not a lot of fresh news, but sometimes big drops can occur not when something major occurs, but when the drumbeat of bad does not let up.

The day started ominously: before the opening bell, the uber-geniuses at Goldman Sachs downgraded the entire brokerage sector to neutral from attractive, but saved special negative shout-outs for Citigroup and GM, which dropped 6.3% and 10.8% respectively on the day. And while it was purely coincidence, Goldman itself was downgraded to market perform by Wachovia (take that!) and its shares fell 4% on the day.

As if that were not enough, crude oil continued its ascent, settling $5.09 a barrel higher at $139.64, after futures touched $140.39, surpassing the previous intraday record of $139.89 reached on June 16. The newest cause for concern for oil is Libya, which threatened to cut output. In sympathy, metals skyrocketed. August gold futures soared $32.80, or 3.7% to $915.10, the biggest percentage gain for a most-active contract since June 30, 2006 and September silver expanded by 61.3 cents, or 3.7%, to $17.22 an ounce, the biggest gain since June 16.

If yesterday were an equation, it would look like this: crippled financials + battered autos + soaring energy = stock drubbing. The Dow Jones Industrial Average fell to new intraday and closing lows for 2008, losing 358.41, or 3%, to 11,453.42, its lowest since September 2006. The news was not much better for the other major indexes: the S&P 500 sank 38.82, or 2.9% percent, to 1,283.15, its biggest drop in three weeks, though still above its March close. The Nasdaq Composite Index tumbled 79.89, or 3.3%, to 2,321.37, its worst loss since January.

OK, so what really happened here? My guess is that investors started to absorb the Fed’s comments and determined that while the central bankers are talking a good game, they are not willing to raise interest rates to help stabilize the dollar and fight inflation with the economy in a frail state. That realization, combined with the fact that people are starting to comprehend that big financial companies are not going to be making money any time soon, was too much for the market to take. The Dow is currently down 9.4% this month, its worst June since an 18% thumping in 1930 during the Great Depression.

Where does this leave us? For some reason--call it denial, numbness or excellent coping mechanisms—I am not hearing panic from clients, radio callers or TV viewers. In fact, of the calls and e-mails that I fielded yesterday, most were asking mundane questions or wondering whether the action presented a buying opportunity.
That non-scientific experience matches the action in the volatility index (VIX), which measures investors' expectations for continued market turbulence. While the index recently increased by more than 13%, it remains roughly 25% shy of its peak reached in mid-March. Technically, that may indicate investor complacency that could yet lead to more declines in the market.

I could easily see a continued test of the March lows, but I am also pleased that my peeps—the long term investors, who are accumulating for future goals, seem a bit more hardened during this period. As I have said many times, part of being an investor is learning to accept the difficult times—without them, there can be no good times. Yes, it was a bad day and probably not the last one, but in a business where guarantees are impossible, I can guarantee that this will pass.