Fear grips global markets

Submitted By Prieur du Plessis

When leav ing Cape Town for a business trip to Europe a few days ago, I did not in my wildest dreams anticipate spending every free moment of my visit glued to television screens to try to stay abreast of the dramatic events in financial markets. I will start the long trek back from Dublin to Heathrow to Cape Town shortly, and will therefore just share a few short notes.

The first ever trillion-dollar loss (as measured by the Dow Jones Willshire 5000 Index) on Wall Street came in the wake of US lawmakers failing to gather enough votes to pass the $700 billion bail-out package. This begs the question: has the elected officials done their constituents a service by protecting their money? Globally, more than $1.7 trillion got wiped off the MSCI World Index.

The sheer magnitude of the plunge makes for interesting reading when put in historical context. Considering the entire history of the Dow Jones Industrial Average since 1896, yesterday’s decline of 777 points ranks as the largest points decline in history (see top table). However, and let’s be thankful for small mercies, the percentage decline of 6.98% was still significantly less than 1987’s 22.61% decline and a host of other uglies, slotting in at 21st position on the ranking (see bottom table).

Yesterday’s sell-off puts the Dow Jones Industrial Average at its lowest level since the fourth quarter of 2005 as shown in the chart below. Possible support appears to be in the area between 9,700 and 10,000.

The CBOE Volatility (VIX) Index serves as a barometer of fear in the US stock markets, having surged by 34.5% yesterday to its highest level in 10 years and the sixth largest ever (on a percentage basis). The VIX Index now trades at levels last seen during the financial crisis in 1998 and the bear market bottom in 2001. Whether the VIX at these levels will mark a turning point as it did on those occasions remains to be seen. Bespoke points out: “… following the ten largest one-day percentage moves since 1990, the S&P 500’s performance in the following day, week, month, and quarter is mixed.”

Grasping at straws, keep in mind that September, on average, has historically been the worst month. But, as shown in a previous study, stock markets has always recovered after that and October, November, December and January have traditionally been good months.

I must press the send button to board my plane, but will conclude by repeating that we are still in the grips of a primary bear market and should tread carefully until the smoke clears and the flames can be measured.

“Nobody wants to catch a falling knife with his bare hand,” Fumikazu Onishi, a Tokyo-based strategist at Nikko Cordial Securities, said in an interview with Bloomberg Television. “Investors are waiting until they are sure the knife sticks in the floor.”

Let’s be careful out there.