- Today's fast-changing environment and its constant crop of new developments create challenges for investors trying to make sense of it all.
- But investors should not make any decisions based on Monday's volatility or emotions.
Was Monday's market drop a tumble, a plunge, or a freefall? Whatever the label, fact is Monday was a huge down day across global stock markets.
Some investors are attributing the drop to the failure of the $700 billion rescue plan to pass the House of Representatives. Yet others are pointing to financial weakness in European banks. With the rush of unprecedented events in the last few weeks and a number of lingering unresolved issues, one of the few certainties is that uncertainty reigns.
The stock market is quick to price in new information. Today's fast-changing environment and its constant crop of new developments create challenges for investors trying to make sense of it all. This weekend was no different. Monday greeted investors with what we see as two categories of information: 1) Newly surfaced information, and 2) Developments on yet unresolved issues.
The first category consists of Citigroup's takeover of Wachovia in an FDIC-brokered deal, fresh evidence of European financial weakness in a spate of government bailouts (including Fortis, Hypo RE, Bradford & Bingley, and Glitnir), and the Fed's substantial expansion of its emergency loan program and credit swaps. Each event creates winners and losers and could be important for investors to track.
The second category consists of the $700 billion rescue plan's failure in the House and potential accounting rule changes surrounding fair value accounting. Both items face unclear legislative futures. But whatever the outcomes, there are likely to be ramifications for the current financial situation—though to what end remains uncertain. Another unknown is the possibility of more negative information that has yet to surface.
Market movements can be pricing in one or a number of these new developments, or even other information altogether. Monday was a big down day, but investors should not make any decisions based on today's volatility or emotions—remember, a couple of weeks ago the S&P 500 was down a bit over 9% over two days, then rallied hard to finish the week flattish. There are still a lot of uncertainties facing investors—and many defy labels.