Markets Tumble, Surpassing Records Set During the Depression

Posted by Frank

October 12, 2008

Wow. The Dow Jones had its worst week in its 112-year history, even passing records set during the Great Depression. The S&P 500 had its worst week in 75-years, falling 39 percent since Jan. 1, 2008. Have we finally hit the bottom? Are more turbulent times ahead of us? How can it possibly get any worse than this?

Unless you have been a miracle investor, your portfolio has taken a hit that nobody would of believed possible only a couple years ago. No longer do employees rely on traditional defined-benefit pension plans where a set income stream is usually promised throughout retirement. Now, employees are faced with taking their retirement into their own hands with 401ks, which have lost trillions of dollars since the beginning of the year. Because of this increased reliance on personal retirement accounts, it’s imperative our markets are corrected soon.

This weekend, financial leaders from across the world met to try to formulate a plan to move forward in a globally coordinated way. Not only are the U.S. markets taking dramatic hits, but because of the globalized way our markets operate, countries everywhere are feeling the U.S. credit squeeze. Weekend talks seemed to have ended with an understanding of principles moving forward. I’m afraid this is a lackluster effort in dealing with such a monumental crisis. We need our countries to formulate an actual plan to tame our markets and have it incorporated world wide. Principles are great for press releases, but as we have seen in our mortgage markets, principles alone are only as good as the actor.

I’m afraid our markets aren’t done falling. The confusing world of derivatives, especially credit default swaps (CDS), will probably continue to drag us down because of the enormous size of the market they represent and the uncertainty of their values (roughly, the CDS market alone is more than a 60 trillion dollar market, with little to no regulation and is greater than two times the size of our stock market.) Although these issues are probably best described in a separate post, I think it’s important to understand that there are still many issues that need to be resolved before investors will be comfortable buying again.

I will continue to purchase securities when big negative swings occur and I won’t sell anything I currently own, however, I’m concerned like you, that the worst may not be behind us. The good news is, it’s a three-day weekend for some and there is plenty of football and MLB playoffs to watch. $

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