Record drop greets Dow as trading resumes

Latasha Webb

Economists expected a sluggish market Monday as trading began after a four-day break, but the Dow Jones industrial average’s biggest single-day point loss in history came as a surprise to many analysts.

Consumer anticipation of a faltering economy in the wake of last Tuesday’s tragedies, combined with the longest break in trading since the Great Depression, flooded the market with sellers yesterday.

“Investors are worried as a result of the events of last week,” said John Chipman, a regents professor of economics at the University.

Bruce Erickson, a business and government professor, said the “pile-up” is partly a result of the market’s lengthy closing.

The loss mirrors 1987’s stock market crash, in which the Dow plunged 508.32 points, or 22.6 percent. Yesterday, the Dow lost 684.81 points at closing, down around 7 percent. At its worst, it was down 717 points.

What keeps Monday’s fluctuation from being defined as a “crash” is the percentage lost.

“To be considered a real crash, it would have to go down between 10 to 20 percent in one day,” Erickson said.

But the near-miss has some experts worried.

Although the stock market hadn’t crashed as of Monday night, Chipman said a crash does not always happen in one day.

“Usually the fall of the stock market precedes the fall of the economy,” he said, adding that the market can slowly drop to dangerous levels.

“Now many consumers have less wealth,” Erickson added. “They cut back their purchases. The industry will have surpluses and prices will fall. Selling is down and companies cut back on costs, including employees.”

The Federal Reserve Board is taking steps to keep Erickson’s predictions from coming true.

Before markets opened, the Fed central bank cut its short-term rates from 3.5 percent to 3.0 percent Monday, the lowest percentage rate since 1992.

But as the Dow continued to plummet early Monday afternoon, several Fed banks decreased the rate again from 3 to 2.5 percent, effective immediately, in an attempt to engage consumers.

It made a slight difference. The Dow recovered slightly from the 717-point drop early Monday afternoon to finish 684.81 points down. The Nasdaq finished with a loss of 115.75 points, its worst finish since 1998.

All of this will likely affect University students.

The University Foundation, recently recognized for raising more than $1.3 billion for Campaign Minnesota, has approximately $750 million in investments.

The Foundation’s portfolios are designed to withstand short-term market shocks, said foundation President Jerry Fischer, so the immediate shock of a sharp decline like Monday’s is generally smoothed out.

“The other implication is that our donors are likely to become more cautious,” Fischer said.

On the other hand, low interest rates could positively affect University students in need of a loan.

Because the central bank lowered its rates to 3 percent, banks across the country could cut their rates and still make a profit.

“Student loans may go from a 7 percent interest rate to a 5 to 6 percent interest rate for students who take out new ones,” said Erickson.

Wells Fargo Bank Minnesota, N.A., lowered its rates from 6.5 percent to 6.0 percent Monday afternoon.

The short-term affects of the tragedies on the market include faltering consumer confidence, massive selling, low buying and record losses.

But the long-term effects are still open for speculation.

“I think it will go lower because there’s so much uncertainty,” said Chipman. “That’s the worst thing for the stock market – uncertainty.”

 

Latasha Webb welcomes comments at [email protected]