2008 Crash Continues to Haunt Investors
The frightening memories of markets crashing around the world and chaotic government rescues three years ago loom very large in investors minds today, influencing their decisions to buy, sell or hold on for dear life.
Thats partially because of the eerie similarities between todays market turmoil with the last crisis: 500-point plunges on the Dow, stomach-turning turbulence and a great fear of the unknown. Its also due to the very close time proximity between the two crises and the incredible pain inflicted by the last one.
Everybody I talk to, thats all they talk about. They say, Oh my God, its 2007-2008 all over again,' said Walter Zimmerman, senior vice president at United-ICAP. That memory is still very, very fresh and people are very, very concerned.
It doesnt necessarily matter that there appears to be very real differences between the 2008 meltdown and this one, including the strength of corporate Americas balance sheet and focus on non-U.S. financial institutions.
Were talking apples and oranges, said Peter Kenny, managing director at Knight Capital. Were talking global now, not just U.S. financial firms. But it feels the same way.
Understandably, investors appear to still be thinking about the enormous pain inflicted by the last crisis, which marked the worst market performance in more than 100 years. From its peak in October 2007 to its depth in 2009, the Dow Jones Industrial Average plummeted an incredible 7,500 points -- translating to a remarkable 53% plunge.
Lowered Pain Threshold
The similarities and the pain from the last crisis have led some investors to sell first and ask questions later.
With that so fresh in the mindset of the market, people are now willing to pull the trigger much more quickly, said Kenny. There is a risk aversion that has been learned.
To be sure, there are very real reasons why investors, hedge funds and traders have sold their positions in recent weeks.
The financial markets are suffering from another crisis of confidence, triggered by Europes response to its sovereign debt debacle, Washingtons debt-ceiling debate and the Federal Reserves efforts to prevent a double-dip recession.
Those fears have sent the blue chips plummeting 2,000 points, or nearly 16%, since July 21. While thats a far cry from 2008, it is still an alarming pullback in just 14 trading days. Volatility has soared: this week the Dow saw its first three-day streak of 400-plus point moves since November 2008.
But the pain of last time, coupled with the loss of wealth created by the housing bust, seems to have lowered investors collective pain threshold this time around. After all, a recent Reuters poll showed economists see just a 25% chance of a double-dip and corporate America continues to weather the storm, as evidenced by Ciscos (NASDAQ:CSCO) earnings beat and upbeat outlook late Wednesday.
People are unwilling to accept a level of pain that pre-2008 they were willing to accept, said Kenny.
In some cases, that has led to indiscriminate selling as part of an effort to just sit out entirely. Even tech rock star Apple (NASDAQ:AAPL) has been unable to escape the sell pressure, sinking 7.36% over the five sessions ended Wednesday.
The willingness of investors, traders and the community to dump perfectly logical investment decisions for fear of losing anything more than they have a risk tolerance for will lead to sales in companies that really should be bought and not sold, said Kenny.
Of course, a lowered bar for pain may turn out to be a good thing for many investors if today's turmoil really does turn into an all-out meltdown as some fear it may. It may save them from great financial pain if the S&P 500 craters to 570 by the end of 2013, as Zimmerman predicts it will.
On the other hand, the new market psychology could cause investors to lock in heavy losses and miss a potential market rebound if this turns out to be a short-term blip.
This Too Shall Pass
For some investors, the current turmoil screams: Buying Opportunity! These are likely the folks who toughed it out and held their positions through the darkest days of 2008 and 2009 or the courageous ones who bought in when everyone else thought the world was ending.
Theyre a little more callous to these moves, said Frank Davis, director of sales and trading at LEK Securities. Its sort of like, Oh boy, Ive seen this movie before and I know where it goes. But if you get to the end of the movie last time, its not a terrible ending.
He is alluding to Wall Streets historic rebound that sent the Dow soaring to nearly 13,000 this spring. While one can argue about the legitimacy and participation of that rally, investors who bought in at the Dows March 2009 low and sold in April, would have enjoyed a remarkable 93% return.
Marc Pearlman, an investment advisor at Securities America who specializes in market behavior, said, Those who sat through 2008 are now sitting here thinking, This too shall pass.
Davis said many individual and institutional investors appear to be a little more attuned into man overboard procedures. He added, Do I think there are great opportunities along with this fear? Abso-freaking-lutely.
Shrinking Gap Between Crises
Given a string of market crises that appear to be moving closer together, it would be hard to blame investors for struggling through the fear to see those opportunities.
When the bursting of the tech bubble is included, the financial markets have been hit by three major periods of great fear in just 11 years. During the dotcom meltdown, the Nasdaq Composite plummeted from 5,048 in March 2000 to just 1,720 in April 2001 -- a shocking loss of 66% -- and it has never fully recovered.
Before that, the last major, major crisis hitting the financial markets was Black Monday, which occurred 13 years prior in October 1987 and caused the stock market to crater 23% -- in a single day. That would be equivalent to a 4,000-point decline in todays Dow.
Many investors really dont have faith in Wall Street anymore, said Jim Rickards, senior managing director for market intelligence at Omnis. They say, I listened to you before and I lost all of my money. People are really operating on a hair trigger.
Rickards pointed to the behavioral economic term anchoring, which refers to a bias the mind gives that relies too heavily on one thing when making a decision.
Behaviorally, we tend to be influenced by the last thing that happened, said Rickards, who is very bearish on the economy.
Many cast blame for the boom-and-bust cycle at the feet of Ben Bernanke and Alan Greenspan, the last two Federal Reserve chairmen.
Its a series of asset bubbles that is getting its life blood from the easy-money policies of the Federal Reserve, said Zimmerman. Keeping interest rates this low encourages this kind of speculation.
Others point to Wall Street, regulators and policy makers in Washington. No matter who gets the blame, the increasingly-small gap between crises appear to be taking its toll on investors psyche.
Theyre not going to ride it down again, said Rickards. They dont want to be the suckers anymore.