NEW YORK – In a roller-coaster day on Wall Street that opened with a 1,000-point Dow drop followed by a midday recovery and an afternoon slide, nervous investors were desperately dialing financial advisers.
By the end of trading Monday, U.S. stocks plunged more than 3.5 percent, down an astonishing 588 points.
Seasoned market advisers, recalling losses in the “Black Monday” stock market crash in 1987, when the Dow lost 22.6 percent, know that in a market crash, the only investors who get out whole are those who manage to sell their stocks first.
Waiting too long produces “paper losses” that for many investors are uncomfortable if not catastrophic. But market veterans know those losses can be recovered if the investor can hold on to depreciated stocks long enough.
Clearly, in 1987, when a 22.6 percent loss meant only 508 points, it was a different game. The Dow closed Oct. 19, 1987, at 1,738.74, only one-tenth of its recent high of more than 17,000.
Treasuries look golden
Some investors believe now is the time to sell, even if it means cashing in stocks at less than their recent highs, provided it would given them a reasonable profit over the sum originally invested.
For those unwilling to sit on the sidelines with cash, stock-market corrections generally pump up the values of cash-equivalents, including Treasury Bonds and cash-commodities such as gold and possibly even silver.
Investors who are savvy enough to go into Treasuries and/or gold as the correction begins may find low prices that will be boosted in value as equity markets deteriorate.
The principle of “what goes up must come down” also works in reverse for equity markets. Professional investors know that in down equity markets, price-equity ratios will create undervalued stocks that suddenly become buying opportunities, anticipating the day when the market begins recover.
What do YOU think? Why is the Dow plummeting? Sound off in today’s WND poll!
China, Greece drive global markets lower
The current global stock-market selloff was precipitated by a surprise decision announced by China two weeks ago to devalue its currency. The aim was to boost exports and jump-start sluggish growth in the world’s second-largest economy. But it caused on Aug. 11 the biggest one-day loss recorded by the Chinese stock market in the past two decades.
Monday’s selloff on Wall Street began as the Shanghai Composite in China closed down 8.8 percent overnight, its worst close sine 2007.
The Economist reported Monday that the “recent sea of red in China” began with the “surprise devaluation” of the Chinese yuan on Aug. 11, with $5 trillion wiped off global stock prices since then.
The Greek debt crisis nearly precipitated what economists feared would result in a “Grexit,” with Greece being forced to abandon the euro and become the first EU nation thrown out of the eurozone. The development came amid growing concerns that government debt levels in Western economies, including the United States, have caused economic slowdowns in an Obama “recovery” that has been sluggish at best.
Fed puts an end to ‘quantitative easing’
WND has reported for nearly two years that the Federal Reserve, unable to sustain a policy of “quantitative easing” under which it purchased trillions of dollars of Treasury-issued debt, is running out of options to help stimulate economic growth or to reverse a sharp market selloff in the short term.
Under the leadership of Federal Reserve Chair Janet Yellen, the Fed has engaged in a “pivot,” shifting concern from stimulating job growth to worrying about inflation. The fear is that without a tightening in Fed monetary policy, the U.S. economy could experience inflation as high as 5 percent in the next two years, a level not experienced since 2005.
In October 2014, the Fed under Yellen’s direction ended the policy of Quantitative Easing in which for 37 consecutive months it had bought Treasury debt in an effort to stimulate the economy by keeping interest rates at or near zero.
Under the QE bond-buying spree, the Fed’s balance sheet ballooned to a record $4.48 trillion accumulated since announcing the first round of QE purchases in November 2008.
Yellen assumed the Fed chair on Jan. 6, 2014, determined to “taper” QE borrowing down to zero by the end of 2014, a goal she achieved in October.
