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Investor fear remains deep despite one-day rally

Since the Nov. 4 election, investors have been abandoning stocks in a kind of slow-motion crash that experts say underlines just how anxious they are about what is likely to be a long and deep recession.
/ Source: The Associated Press

Since the Nov. 4 election, investors have been abandoning stocks in a kind of slow-motion crash that experts say underlines just how anxious they are about what is likely to be a long and deep recession.

Even after a late-day rally on Friday, the benchmark Standard & Poor's 500 index has plunged 20 percent since the election. That more than wiped out the index's 18 percent gain in the six trading days ahead of the balloting as optimism grew that Barack Obama would be elected president.

Analysts aren't blaming Obama specifically for the postelection hangover. Rather, they peg it to growing fears that the administration of President George W. Bush and the Congress are fumbling the $700 billion bailout plan. There's also worry about the weakened economy's impact on financial stocks — highlighted by the plunge in shares of Citigroup Inc. to below $4 a share.

"You can almost hear people yelling, 'Get me out at any price,'" said Al Goodman, chief market strategist at Wachovia Securities. "It's the highest level of fear and depression in my 45 years as a student of the market."

Market experts define a crash as a decline of 20 percent over a single day or several days. Over seven trading days that ended Oct. 9, the Dow lost 22 percent.

This month, the S&P 500 skidded more than 25 percent in the 12 trading days after the election before a bounceback on Friday narrowed the loss to 20 percent.

All told, stocks have lost a stunning $2.6 trillion since Nov. 4, as measured by the Dow Jones Wilshire 5000 index, which reflects the value of nearly all U.S. stocks.

The Friday afternoon news that Obama is likely to choose Timothy Geithner, the president of the New York Federal Reserve, to be the next Treasury secretary helped spark a rally that sent the Dow Jones industrial average surging almost 500 points.

Geithner has worked closely with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke this year as the government seized control of mortgage giants Fannie Mae and Freddie Mac and insurer American International Group Inc.

But analysts say it would be a mistake to say Friday's market reversal marks an end to the carnage that has wiped out 45.8 percent of the value of the S&P 500 index since the start of the year.

"I don't think anyone can say we've reached the bottom yet," said Chuck Gabriel, managing director of Capital Alpha Partners in Washington. "It's going to be a very gloomy Christmas."

Kim Caughey, equity research analyst at Fort Pitt Capital Group in Pittsburgh, said that "for investors to get more confidence, we need to know details" of the new administration's plans to handle the crisis.

"There's been a vacuum of leadership" she added, "and when that happens, you get fear and rumors, and then people sell."

On Saturday, Obama outlined a plan to create 2.5 million jobs with public works programs that will rebuild roads and bridges, modernize schools and create alternative energy sources.

"These aren't just steps to pull ourselves out of this immediate crisis; these are the long-term investments in our economic future that have been ignored for far too long," Obama said in the weekly Democratic radio address.

The economic recovery plan being developed by his staff aims to create millions of new jobs by January 2011.

The state of the economy also isn't helping. The government reported last week that new claims for jobless benefits rose to a 16-year high. And while the price for gasoline and other consumer goods are falling, that's raising fears that a deflationary environment would further zap spending and corporate profits.

The market's inability to turn around also has fed criticism of the government's handling of the crisis.

Since being rolled out a month ago, the Treasury Department-administered bailout has undergone two major revisions. One was its abandonment of the original plan to buy banks' toxic assets. The second was its decision to let the Obama administration decide how to spend the second half of the $700 billion.

"It doesn't instill confidence; it erodes it," Joe Battipaglia, market strategist at Stifel Nicolaus, said of the shift in course.

"The perception on Wall Street is that Washington is rudderless," he added. "There's no leadership on the pressing issues of the day ... and time is running out."

Anxiety about the rescue plan has punished shares of the nation's biggest banks, which received $125 billion in government capital injections under the rescue plan. Shares of financial service companies on the S&P 500 have fallen 41 percent since the election and 23 percent in the past week.

None have suffered like Citigroup. The global banking titan's shares slid a combined 55 percent Thursday and Friday and ended the week at $3.77 on fears that it will have to take even bigger charges for loan losses.

Also rattling investors have been troubled congressional talks on whether the government should bail out the Detroit automakers. The failure to get a deal done upset markets earlier in the week and could further threaten the stock market if left dangling.