Tuesday promises more treachery for investors as they navigate markets held captive by politicians and the promise of a rapidly faltering economy.
And thankfully, Tuesday is the final day of the dreaded month of September and the third quarter, during which the S&P 500 has lost 13 percent. Hedge funds, mutual funds and investors of all stripes have had one tough month, and the pain is not over. The end-of-quarter mad dash to cash has taken a huge toll on stocks, commodities and the constricted credit markets.
This is the fourth straight quarterly decline for the Dow, a phenomena we haven't seen seen since 1978. The Dow is down about 9 percent quarter-to-date, and is heading for its worst performance since third quarter, 2002.
Compounding the wobbling in markets was the chaos in Congress. The House of Representatives Monday failed to pass a financial rescue package, ripping a trillion dollar hole in the stock market. The Senate was to vote on that bill Wednesday, and the House could revisit the topic. But to the markets, there is no sense that Congress will be able to resurrect the $700 billion bail out package that was seen as a necessary tool to get credit markets moving again.
While Congress failed to act, credit spreads held at near record levels and the stock market tanked. Some in the markets say the market chaos may be the motivation Congress needs to move on passing legislation aimed at unfreezing credit markets. The VIX, the CBOE Volatility Index, spiked to levels not seen since 2002.
The Dow lost 777 or nearly 7 percent Tuesday, while the S&P lost 8.8 percent and the Nasdaq lost 9.1 percent. The S&P 500 fell through the technical zone of 1128 to 1133 that traders were watching as a level of support, and now the next move is even more uncertain.
While stocks were falling globally, investors continued to dump commodities, in a trade that signals investors fear a global economic slowdown. Oil was down $10.52 per barrel to $96.37, and the only commodity to find buyers was gold.
What the H*$% Happened?
Maybe you just said that when you looked at your retirement savings. Or maybe, like so many traders you were counting votes as House members decided the fate of the bailout package early Monday afternoon. "You could see people do a countdown as each vote came in," said one trader who said the air on the floor was thick with emotion. "As we got close to 'no,' the bottom just fell out of the market."
The latest banking casualties came Monday when Citigroup in an FDIC-brokered deal, bought Wachovia assets. Citi gave the FDIC an equity stake in exchange for agreeing to cap Citi's future losses on Wachovia's mortgage portfolio at $42 billion. In Europe, three governments moved over the weekend to bail out Fortis, and the U.K. moved to nationalize mortgage lender Bradford and Bingley.
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Now that the bailout vote has failed, traders are speculating the Fed may have to ride to the rescue with an emergency rate cut to unfreeze the jam up in credit markets. The big fear is that business borrowing will be so hampered that companies will curtail business activity and lay off workers, adding to an already weakened economy's woes.
In a note after the House vote, Citigroup economists said: "We believe the rapid deterioration in the outlook reflected in worsening financial conditions could prompt a return to traditional rate cutting at any time now. We would not rule out a funds rate at or below 1 percent relatively soon."
They go on to say this action would complement existing efforts to aid market functioning and could parallel similar moves from the European Central Bank and Bank of England. The Fed continues to flood the market with record amounts of liquidity, and Fed watchers expect it to continue to do so as long as needed.
The Citi economists also say news such as consumer spending data indicate that consensus expectations about near term growth are likely too high, and GDP may fall outright in the third quarter. This is a view we are hearing more and more. Watch for more forecast cuts.
Some important data is due Tuesday, including the S&P/Case Shiller home price index for July is released at 9 a.m. Chicago purchasing managers data is released at 9:45 a.m. and consumer confidence is reported at 10 a.m.
President Bush is scheduled to speak at 8:45 a.m.
But the question is what will Washington do? As the clock ticks on the race for the White House, an overly politicized Congress has so far failed in its effort to assess and take action to stop a credit markets and banking system meltdown.