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The Markets Are Terrified: Should You Be?

Posted Sep 29, 2008 07:38pm EDT by Aaron Task in Investing, Recession, Banking

The "sum of all fears" scenario became reality Monday after the House rejected a $700 billion bailout package.

The Dow suffered its largest point decline in its history, 778 points, while the S&P was off 8.75%, its worst decline since 1987, and the Nasdaq lost over 9%, which will certainly grab headlines -- and rightfully so.

But the real crisis remains in the credit markets, as Bloomberg details:

  • Rates on three-month Treasury bills declined 55 basis points to 0.29%, not far above the levels hit on Sept. 17 when they hit their lowest level since WW II.
  • The three-month London interbank offered rate (LIBOR) -- a key measure of lending rates between banks -- climbed to 3.88%, the highest level since Jan. 18 and up from 2.81% a month ago.
  • The so-called TED Spread -- the difference between what banks and the Treasury pay to borrow for three months, widened to 3.59%, the most since Bloomberg began compiling data in 1984. The TED Spread was 1.10% a month ago and has averaged 0.56% over the past five years.

In plain English, those figures mean banks are extremely reluctant to lend to each other, which means they're not going to lend to you and I as consumers, or businesses either. The Fed is injecting tremendous amounts of liquidity into the financial system to get banks lending again, to little avail so far.

This isn't just a long-term concern: corporate America relies on overnight lending and short-term commercial paper markets to fund day-to-day operations; an inability to tap those sources of liquidity could result in mass layoffs in the "real" economy, which is something to fear.

Treasury Secretary Hank Paulson warned about such dire consequence before, during and after the House vote on the bailout package Monday.

"Markets around the world are under stress and that reduces the availability of credit that businesses across America depend on to meet payroll and to purchase inventories," Paulson said Monday afternoon. "We've got much work to do and this [rescue package] is much too important to simply let fail."

On Monday, investors got a taste of just how important the absence of a plan can be. I wouldn't recommend anyone sell after a day like Monday but wouldn't be in a rush to buy stocks either. Monday's point decline was the worst in the Dow's history but it didn't make the top 10 on a percentage basis. Notably, three of the Dow's five worst percent drops occurred within a 6-week period in 1929 and two of the top 10 occurred in October 1987, meaning things can get worse and really big declines tend to occur in clusters.

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520 Comments

Pat
Pat - Monday September 29, 2008 08:00PM EDT

Absolutely not, the markets will calm down as soon as the fear, and panic retoric that's been used to ram the BAILOUT BILL down our throats subsides.. We will go through a correction in the markets, like the real estate industry did from it's highs, but we shouldn't be scared or panic, the market will correct itself. We must to have a deeper sense and belief in our Capital system, and not rush into the dispair of Socialism. The pro BAILOUT BILL

Yahoo! Finance User
Yahoo! Finance User - Monday September 29, 2008 08:06PM EDT

I'm glad the House Voted NO for this Bailout. Thank the majority of 133 Republicans and 95 Democratics.

Yahoo! Finance User
Yahoo! Finance User - Monday September 29, 2008 08:14PM EDT

Look we have been here before...when ,we were terrified from Bush and buddies about chemical warfare from Saddam would attack us...did we not get duck tape and plastic wrap around our houses stop that attack and defeat the plan and save us... If Bush had wore his flight jacket and had a sign we WON along with plastic wrap and duck tape this would be a non issue

Pat
Pat - Monday September 29, 2008 08:22PM EDT

Absolutely not, we should have a much deeper belief in our Capitalist system, and not be rushed into a Socialist solution. The BAILOUT proponents are going to try their same tatic, and try to scare us into a swift vote. Do not panic, that is exactly what they want you to do. The markets will correct themselves, just like the real estate market did from it's highs. Today's drop was a record point drop, but not a large percentage point drop. The latter is the real number to watch. Stay calm everyone, we need a correction, and then things will start to look better again. The Wall streeters don't want to suffer a correction just like homeowners didn't want to see a correction in the values of their homes. If you can't stand the heat, get out of the kitchen. Bank will MERGE, airlines too, credit markets will be restored at a more responsible level, and the sky won't fall down. THEY SAID IF THE BILL DIDN'T PASS TODAY THAT THE WORLD WOULD COME TO AN END, DID IT!!!!!!!!!!!!! NO BAILOUT, NO BAILOUT..... KEEP THE PRESSURE ON YOUR CONGRESSPEOPLE.....DON'T LET UP.....EVERYTHING IS GOING TO BE ALL RIGHT....

bb
bb - Monday September 29, 2008 08:25PM EDT

There is nothing to fear but fear itself. Take a long look and not short-selling yourself on "sum of all fears".

Brett
Brett - Monday September 29, 2008 08:29PM EDT

By not passing the bail out the US economy is going to collapse; the stock market and the US dollar.

Don
Don - Monday September 29, 2008 08:31PM EDT

Hello Dow 8200 !!!!

Yahoo! Finance User
Yahoo! Finance User - Monday September 29, 2008 08:32PM EDT

throwthemout.org says it all. we need term limits for congress and the senate. No where else can so many losers collect for such a long periold of time as congress and the senate! throwthem out!

scott
scott - Monday September 29, 2008 08:34PM EDT

Examples of evil Socialism: The Great Depression solution and the new deal, and World War II when we implemented central planning...and look. Here we are, not eating cheese and still a capitalist society. This anti-socialism sentiment is moronic There are times in a country's history when we must come together to do the right thing in the interest of the nation. I understand not wanting to Bail out bad decisions, but when $1 trillion gets wiped out in 1 day in market (and believe me there is likely more) how smart is it to be looking out for your $5000 dollars in tax money when the goverment, local and national are losing much more in revenue, when jobs will continue to be cut even more precipitously in the face of the abyss. We are talking about basic business functions counting on overnight lending. This is nuts.

JoshS
JoshS - Monday September 29, 2008 08:34PM EDT

Fright is good!!!

Sammy
Sammy - Monday September 29, 2008 08:36PM EDT

3 weeks ago all I use to hear on the news (all TV Chanels, including CNBC) "Our economy is solid, the fundamental is Great.." Now Explain how could all that changed in 3 weeks? I bet you we've been lied to the last 8 years, and we will start discovering more and more surprises before the term of this administration is over. If the government was truthfull with themself and the people who elected them, All this turmoil could have been predicted and prevented.

Nemo
Nemo - Monday September 29, 2008 08:38PM EDT

wow i cannot believe that they rejected the bailout! wow! im taking my money out of the market for a while!

gorgonblood
gorgonblood - Monday September 29, 2008 08:40PM EDT

Wow - so glad to see so many smart people here! The bailout was a joke...we should be happy it failed. Yes, the market is in for pain. It was overvalued. If you get your investing advice form the likes of Jim Cramer and other Game Show type forums, then you deserve to get burned buying stocks like RIMM and all the rest. Those of us who were rational and applied time-tested metrics of valuation to stock could see it was time to get out two years ago. If you are nearing retirement and have 100% of your funds in equities...you are a fool. That is finance 101. And you know what they say about a fool and his money. Time to take the pain and be calm and look for the few good bargains out there This too shall pass

gustave
gustave - Monday September 29, 2008 08:40PM EDT

why doesnt anyone mention what treally brought this on. the rising price of oil and gasoline that took people money that would have been for mortgages and other debts.

Richard L
Richard L - Monday September 29, 2008 08:41PM EDT

unfortunally , i think we need the bail out.

g
g - Monday September 29, 2008 08:41PM EDT

There is nothing to fear but nothing itself.

Jeff
Jeff - Monday September 29, 2008 08:41PM EDT

We need government reform in a big way...the first thing we should do is pass the Fair Tax. This will make the USA the BEST place to do business and the best place to keep your money. It will eliminate capital gains and all corporate income taxes. We spend hundreds of billions of dollars just to pay our taxes each year...that is wasted money that could be spent elsewhere. Then we need to make government keep their books just like we do in the private sector and really CUT SPENDING MONEY WE DON'T HAVE!

Charles
Charles - Monday September 29, 2008 08:42PM EDT

You guys are all stupid or sth? The loss in the market today is over 1 trillion, way over $700bn (possibly much less) it might cost for the bank rescue. Go take a look at your 401K and see if you can keep saying the same $hit you saying. If market completely lose confidence, and economy comes to a total halt because of the govt don't do anything about. You should start worrying about your own job, your house and you car. The US economy desperately need this bill to pass to restore some stability. I don't believe any of those brave souls above can say they are happy without a bailout when you cant find a home loan, a car loan and cant send your kids to college and best yet, you don't have a job in the next 3-6 months if we do go into a deep recession. Go figure.

delphi4U
delphi4U - Monday September 29, 2008 08:42PM EDT

WHAT? NO MONEY? A. E. NEWMAN

Charles
Charles - Monday September 29, 2008 08:43PM EDT

You guys are all stupid or sth? The loss in the market today is over 1 trillion, way over $700bn (possibly much less) it might cost for the bank rescue. Go take a look at your 401K and see if you can keep saying the same $hit you saying. If market completely lose confidence, and economy comes to a total halt because of the govt don't do anything about. You should start worrying about your own job, your house and you car. The US economy desperately need this bill to pass to restore some stability. I don't believe any of those brave souls above can say they are happy without a bailout when you cant find a home loan, a car loan and cant send your kids to college and best yet, you don't have a job in the next 3-6 months if we do go into a deep recession. Go figure.

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