Small investors dazed, confused by fluctuations
Specialist Justin Bohan holds his head as he works at his post on the floor of the New York Stock Exchange yesterday. Stocks plunged in the final minutes of trading, sending the Dow Jones industrial average down more than 675 points.
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Wall Street's unrelenting slide accelerated yesterday, as the widely watched Dow Jones Industrial Average fell 679 points, leaving it at levels last seen in 2003.
The Dow's 7 percent fall was accompanied by nearly an 8 percent drop in the Standard & Poor's 500 and a 5 percent decline in the Nasdaq. The Post-Gazette/Bloomberg index of regional stocks fell 7 percent, paced by double-digit declines by U.S. Steel, Allegheny Technologies, Alcoa and other metals producers.
Yet another daily market autopsy makes small investors even more dazed and confused. Their anxiety is heightened by two things: most have never experienced this kind of broad market collapse before, and they are still becoming used to the idea of managing their own retirement accounts.
Individuals held $4.5 trillion in Individual Retirement Accounts and another $4.3 trillion in 401(k) and other employer-sponsored retirement plans at the end of March, according to the Investment Company Institute. More than half of the money was invested in mutual funds, the industry group reported.
That may change as risk-averse investors abandon the stock market for what they perceive to be safer havens.
"The general tone is fear. Fear feeds on itself and that's what we're seeing," said David Hunter, chairman of Hunter Associates, Downtown.
But small investors scurrying to protect their $40,000 IRA portfolios can't provide all the momentum needed to drive the Dow down 18 percent over the last week, 26 percent since September and 35 percent this year.
Only the pros can do that kind of heavy lifting.
"It would take institutional money to move things like this," said Geoffrey Gerber of Twin Capital Management in McMurray.
Pension and endowment funds typically do not respond this quickly to major market moves. Many believe the engine for what so far is the second worst bear market since the Great Depression -- the 2002-02 market out-tumbled the current market -- is running on fuel provided by mutual funds and hedge funds.
Hedge funds, which cater to affluent investors, are getting calls from well-heeled clients who want out. That generates a wave of selling. Many hedge funds were leveraged, investing with borrowed money. When the value of their leveraged investments went down, their lender called the loan, forcing the hedge fund to sell.
"We're going through an unprecedented deleveraging process, primarily driven by institutions and hedge funds," said David Root of D.B. Root & Co., Downtown. "The forces that drive the market down are the institutions and the hedge funds, not the individual."
Penn State finance professor J. Randall Woolridge said many hedge funds took large positions in steel, coal and other commodity producers. The funds began selling those profitable positions to take profits. The selling accelerated with growing fears of what a recession will do to demand for the commodities.
"These guys are getting hit with redemptions and they're just selling, selling, selling," Dr. Woolridge said.
Alcoa fell 15 percent yesterday, closing at $12.46, off $2.25. U.S. Steel, which hit a high of $196 in June, finished yesterday at $46.39, down $6.98 or 13 percent.
Small investors aren't blameless. Many of those who have been able to reach their mutual fund companies are placing sell orders. If a fund doesn't have enough to cash them out, it has to sell stocks to raise the money. Than exerts more downward pressure.
"It may explain in part why you get some heavy institutional selling late in the day," Mr. Gerber says. "Mutual funds are trying to front run the retail [redemptions] to accumulate cash. They have to be concerned about withdrawals."
There's no shortage of market watchers who say Wall Street's plunge has created buying opportunities of a lifetime. But given the lack of rhyme or reason to the market, most are afraid to put their money where their mouth is.
"There is not a logic to what's going on right now," said Diane Pearson with Legend Financial Advisors in McCandless.
"It used to be the government could step up and make statements and we would see positive developments," she said. "The fear is that deep that [people] don't trust the government any more."
Today's speculation about when, where and how it will all end will likely be irrelevant after tomorrow's crush of headlines.
"My sense is we're probably seeing the worst of it right now," Mr. Root said. "We're probably in the fourth or fifth inning."
For the record, the typical bear market lasts 1.5 years and sends the market 30 percent lower. By Dr. Woolridge's reckoning, this bear is one year old and the market is down nearly 40 percent.
The Penn State professor said bear markets typically have four things in common: there is usually a bubble in some asset class (it's housing this time); there's usually easy money involved; and there's usually a government bailout.
"The fourth common component is it's going to happen again in four or five years," Dr. Woolridge said.
First Published October 10, 2008 12:01 am