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This Week in the Stock Market posted on Friday, 17 October 2008

This past week, the stock markets have been reacting in a knee-jerk fashion to any and all news coming out of Washington, D.C.

By Sarah de Crescenzo

The financial crisis is pervading every aspect of life at the moment – foreign countries are working with the U.S. to help stabilize the global economic situation, presidential candidates are fielding pointed questions about how they will resolve it, and many individuals find themselves glued to the stock market ticker as their life savings hang in the balance. With a glut of news appearing on a daily basis about the status of the economy, it’s hard to keep track of exactly what’s going on. Here’s a quick synopsis relating how the market fared this past week and why some investors acted as they did.

There was a measured sigh of relief on Monday as the markets rallied strongly from the dismal selling-spree of the previous week. Following news of global initiatives to loosen the credit freeze as well as more specific information about the government’s $700 billion bailout package, investors seemed to regain a modicum of confidence, and began to move money around. The Dow Jones industrial average recorded its best one-day percentage gain since Sept. 1932, closing more than 11% up from the day’s beginning.

CEO Matt Battiata of The Battiata Real Estate Group believes that part of the instability demonstrated in the markets results from the fact that investor confidence in the ability of the federal government to deal with the economic situation is shaky at best.

“There is a current lack of confidence among major lenders the federal government’s ability to solve this crisis which is causing them to hold onto their money,” he said. “The perception is that the feds do not have a well thought out plan and this is causing the lack of confidence in the fix. Had the bailout been rejected a second time, it would have caused people to have even less confidence in the fed's ability to fix the problems.”

While stock value surged Monday, the credit market hardly posted a reaction to all the efforts being aimed at encouraging lending in between banks. The three-month Libor, or the interest rate at which banks lend to one another for three months, dropped slightly from a 2008 high of 4.82% Friday to 4.75% after the Monday rally.

In a direct effort to change the state of the credit markets, an announcement Tuesday by the federal government reported an immediate influx of $250 billion to be invested in the U.S. banking system. Nine financial institutions that have already agreed to participate will receive about half that amount, and among those banks participating include the four largest in the country – Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.

In response, stocks belonging to the banks involved for the most part surged ahead, though both technology and commodity stocks suffered a slight backlash from Monday’s rally and dropped in value.

Talk of recession on Wall Street spurred investor anxiety Wednesday, leading to the Dow’s second largest one-day point loss, a day only superceded by Sept. 29 this year when the House of Representatives rejected the government’s $700 billion bailout plan. The Standard & Poor 500 reacted similarly, also recording its second worst one-day point-loss besides Sept. 29, 2008. Remarks by Federal Reserve Chairman Ben Bernanke combined with gloomy forecasts from the Fed to drive down the stock market in a panic-filled day.

In keeping with the volatile nature of the week, Thursday, at least, ended on a positive note. The dreaded last hour before the close of the markets yielded an unexpected upswing of 400 points in the Dow. This increase provided a sigh of relief, especially after the earlier days in the week where investor fear seemed to intensify shortly before the markets shut down for the day.

While it is easy to be pessimistic or simply slightly fearful about the uncertain trends we see occurring in the national, and even global economy, Battiata has some words to the wise for local San Diegans: “Don't overreact, remember it is usually not has bad as it seems, save your money, be ready to buy at the bottom of the market and vote in November.”

Posted by bizSanDiego: San Diego Business News