After Federal Reserve Chairman Ben Bernake’s uninspiring testimony to Congress, in which he demonstrated his clear grasp of the obvious, observing that cutting taxes and increasing spending is bad for the government’s finances and tends to be inflationary, and sharing gems like “developments in the labor market will bear close attention”, worldwide stock markets unanimously voted no confidence while US markets were closed Monday for Martin Luther King day:
Off-market futures trading of the Dow Jones Industrial Average dropped 497 points, the worst one-day drop since Sept 11th 2001.
- India’s Sensex was down 11.5% and trading was halted to give the market a breather
- The Hang Seng index in Hong Kong was down 8.4%
- The Nikkei index in Japan was down 5%
- Chinese and Australian markets were also down sharply.
While a substantial rate cut would be welcomed by markets, some new, decisive, and brilliant action is needed, and the markets did not hear what they were listening for.
As futures prices are predictive of the price of the related assets they track, you would expect the Dow Jones Industrial Average to open down about 500 points Tuesday morning. This will trigger margin calls to many who are holding stocks financed with borrowed money, and triggering many stop loss orders, so it is likely that the sell-off will continue at least through much of the morning. To match the percentage drop on October 19, 1987, the Dow index would have to drop over 2500 points Tuesday.
What remains to be seen is whether or not there will be some kind of announcement of imminent action designed to calm the markets.
Panic selling is not a great strategy. It didn’t work in 1987 or 2001 and there isn’t any evidence that this time is any different.
In his investment advisory letter, Norman Fosback, who has a long and credible track record, predicts that any business slowdown will not be broad-based, and any possible recession will be mild.
{ 5 trackbacks }
{ 0 comments… add one now }
Leave a Comment