Monday, August 15, 2011

Jittery investors flee risky stocks

NEW YORK — The downgrade of the USA’s once-pristine triple-A credit rating got a failing grade from Wall Street on Monday, as stocks suffered their worst plunge since December 2008, leaving the fragile stock market on the brink of another bear market.

The fallout from the nation’s first-ever downgrade to AA+ hit global stock markets hard Monday in the first day of trading since rating agency Standard & Poor’s made the U.S. pay for the federal government’s inability to agree on a credible plan to rein in its spiraling deficit.

Investors in Asia, Europe and the U.S. all fled risky stocks in panic selling in response to the downgrade, coupled with the ongoing debt crisis in Europe and recent signs of a slowing economy.

The benchmark Standard & Poor’s 500-stock index fell 6.7 percent, extending its loss from its April 29 bull market high to 17.9 percent. That steep, sudden drop has reopened the psychological wounds investors suffered back in the 2007-09 bear market, when fears of a financial system meltdown knocked the market down nearly 57 percent, erasing the financial security of millions of Americans.

“This is clearly a Blue Monday. Nerves are raw, and there’s clearly panic in the air,” said Paul Schatz, president of money management firm Heritage Capital. “So many people sat through the ’08 (market plunge) without making a single move. It is unsettling, and people don’t want to live through it again.”

In an ominous sign, the S&P 500 is nearing the 20 percent drop required for Wall Street to officially designate the recent carnage as a bear market. The sheer velocity and ballooning size of the losses not only accelerate the stock market’s downside momentum, they also increase the odds of a dreaded bear market, according to data from Ned Davis Research.

In the 42 “severe corrections,” or a drop of 15 percent or more, the S&P 500 has morphed into a bear market 60 percent of the time, NDR data to 1928 show. And the average decline in those bear markets was almost 36 percent.

There’s no reason to wait for that 20 percent threshold, said Richard Suttmeier, chief market strategist at “Stocks are already in a bear market.”

The broad market, he said, has already broken the uptrend that was in place since the March 2009 lows. The downside of that fractured stock chart pattern is that a new trend heading in the opposite direction occurs.

A game changer

“The S&P credit downgrade, which has never happened before, was a game changer,” said Suttmeier, who sees nothing on the horizon that will entice investors to buy stocks.

Paradoxically, the 10-year U.S. Treasury note, which was downgraded by S&P and can no longer be considered a risk-free investment as a result, rose in price, as jittery investors bought bonds in search of safety.

That buying, which knocked the yield down to 2.34 percent, from 2.57 percent on Friday, sent a message that the U.S. is still considered a safe place to deposit cash and investors trust they will get paid by the U.S. government.

“It shows the U.S. is still creditworthy,” said Chris Konstantinos, director of risk strategy at Riverfront Investment Group.

Edward Yardeni, market strategist at Yardeni Research, said the credit downgrade caused a big drop in investor confidence: “We are clearly in a crisis of confidence around the world.”

Investor panic was so widespread that a widely followed “fear gauge” skyrocketed 50 percent on Monday to its highest closing since the bottom of the last bear market on March 9, 2009.

Other market watchers cited the credit downgrade as the catalyst that got investors to rethink their bullish global growth story and to start to entertain the notion that the U.S. could slump back into recession.

A rally this week?

Still, many investment strategists say it is premature to say the current fall will keep deteriorating.

“The weak start was expected following the debt downgrade,” said Tim Hayes, an investment strategist at NDR. “But I would still put this in the correction category. The market has gotten very oversold, with high pessimism, so the market should start to rally this week.”

Some Wall Street strategists insist the selling is panic-driven and does not jibe with the still-positive drivers of stock prices.

Brian Belski, chief investment strategist at Oppenheimer, argues that the strength of Corporate America, with strong earnings momentum and a mountain of cash, is the main reason he is not altering his investment outlook.

“At times like these, investors often ignore the positives,” he says. “U.S. corporations are generally in a much better place than the rest of the world.”