It’s been one year but the psychological impact of last September’s chaos is still hovering over Wall Street.
Faced with the real prospect of an all-out financial collapse, the markets were gripped by fear and panic this time last year, sending the Dow Jones Industrial Average to territory unseen since the Clinton administration.
“There was a palpable fear. There was an anxiety that was so deeply rooted that people were fearful of simply coming into work,” said Peter Kenny, managing director at Knight Capital Markets. “Even the sharpest, shrewdest, most risk-friendly investors in the world were running for the hills.”
That contrasts sharply with today as the Dow has surged more than 3,000 points from its crisis-low of 6547 amid signs the world is poised to make an economic comeback. Despite the huge gains in the stock market, even some bullish investors are cautious and feeling snake-bitten.
“Clearly the markets have priced in recovery and discounted the end of the world apocalypse scenario and yet no one is comfortable,” said Kenny. “It’s an indelible mark. They can’t let go of that feeling. It is still in us.”
‘Just Get Me Out’
It all goes back to last September when in the span of just weeks Wall Street saw the implosion of investment bank Lehman Brothers, the last-minute sale of Merrill Lynch to Bank of America (BAC) and near collapse of intertwined insurer American International Group (AIG).
Fear reigned over Wall Street about what might happen next, sending stocks plunging, freezing the short-term credit markets and bringing the world’s greatest economy to a grinding halt. The Dow lost 504 points the day Lehman failed, its worst drop in more than six years.
“Every night you’d go home and wonder what would happen overseas or who would fail next,” said Joe Saluzzi, co-head of trading at Themis Trading.
Fear hit a fevered pitch when the Reserve Primary fund “broke the buck,” becoming the first money market fund to fall below the sacred $1 mark.
“All of a sudden you’ve got mom and pop getting nervous now,” said Saluzzi. “That was: ‘The world ending. Go get the guns because we’ve got major problems here.’”
The markets regularly swung hundreds of points last September on rumors regarding problem banks and talk of government bailouts.
“We entered a period of: ‘Just get me out. I will sell anything at any time just to get me out of this thing,’” said Brian Belski, chief U.S. equity strategist at Oppenheimer. “It was an unprecedented type of behavior on all fronts.”
Where’s the Euphoria?
Credit markets slowly healed as the government stepped in with an alphabet soup of rescue programs that restored faith in the system. Signs that the U.S. economy had staved off the worst, first appearing this spring, helped stabilize the equity markets and set the stage for the huge rally off the March lows.
Despite the markets’ gigantic gains over the past six months, there remains a significant amount of apprehension on Wall Street, mostly due to the events of last September.
“You don’t have that giddy feeling. You don’t have that euphoria you’d expect. You have extreme caution,” said Saluzzi.
Part of the reason for the extreme caution is the underlying economic weakness that even the bulls can’t deny. Unemployment last month climbed to the highest level since 1983, retail same-store sales in August fell for the 12th consecutive month and houses are worth just a fraction of their peak values.
“They are afraid of a repeat. When people get hurt on Wall Street, they don’t forget it,” said Belski
Some traders point to a number of market-related signs that suggest the caution is warranted.
“There are a lot of clues that maybe this market shouldn’t be where it is,” NYSE trader Doreen Mogavero recently told FOX Business, pointing to “pathetically weak” trading volume, selling by insiders and too many secondary offerings. “I’m not sure there’s anything sustainable behind it.”
Saluzzi is more bearish, saying: “This is the most hated rally we’ve seen in a long time. Most people are waiting for this thing to implode.”
Is the Worst Over?
Market observers and traders remain at odds about whether or not the worst is truly over for stocks.
“There is a tug of war between people who think corporate profits will be strong and people who think commercial real estate and impending doom in the real estate markets will bring the market down again,” said Steve Rogers, who manages $350 million in assets at California Investment Trust.
While he said the markets probably won’t return to their March lows, Rogers said “commercial real estate is an utter disaster” and he remains worried about the housing market.
“We see a very low probability of the March lows being seen any time soon,” said Belski, who called talk of “impending doom” in the commercial real estate market “greatly exaggerated.”
He said it’s not fair to compare that market with the housing one because “on a relative basis, Corporate America has done an awesome job of managing their balance sheets.”
Snake-Bitten
Others are cautious today not because they fear the economy, but because of a shift away from the reckless greed that dominated most of this decade.
“People are afraid to put their hand in the cookie jar again,” said Kenny. “It was nice getting the ride up but thank you. I’m comfortable taking some chips off the table.”
But there’s clearly a silver lining in this cautious investor state of mind. After all, it was ill-fated beliefs such as those that housing prices could only go up that started this downturn in the first place.
Stocks tumble amid investors’ worriesGovernment Fears Commercial Real Estate Defaults: WSJ
