Stocks crashed through a psychological barrier on Monday, falling below 7,000 to close down 4.24% for the day, at 6,763 the first market close under 7,000 since May 1997. The broader S&P 500 was down sharply as well, falling 4.66% to finish at 700.82. (See 25 people to blame for the financial crisis.)
The market opened on a sharp down note after absorbing a weekend of anxiety over AIG, the black hole of an insurance company that is swallowing another $30 billion of government assistance with no assurance that it won't need more. Monday morning, AIG reported a colossal loss of $61.66 billion for the fourth quarter of 2008. Citigroup also cast its own dark shadow with news last week that the government will convert preferred shares it owns for up to a 36% stake in the troubled financial services firm.
Investors worldwide were sharing the same anxiety over the weekend and it arose early on Monday to take down markets everywhere. Hours before Wall Street woke up to a March snowstorm, Tokyo's chronically weak stock market avalanched 3.04%; shares of Hong Kong stocks were down steeply too, falling 3.68%; European markets were mostly off 4% or more. As the day progressed, Latin markets fell in tandem with U.S. Argentina's bourse closed down 7.4%.
About the only positive performance today came from Treasury bonds and notes, as investors scurried to the safety of government securities, and the VIX, the volatility index traded on the Chicago Board of Trade, which rose 11% on the day.
Frightening financial headlines quickly overwhelmed what little good economic news there was, such as an unexpected rise in U.S. personal income. A quick look revealed that it was largely driven by transfer payments, such as Social Security inflation adjustments and an extension of unemployment benefits, not the kind of capitalist fuel needed to power a real economic recovery.
More eye-catching was a report of more weakness in the manufacturing sector, and a bearish Commerce department report on construction spending, which declined at a seasonally adjusted 3.3% rate in February, confirming that the recession is still well in play.
There were no safe havens: Energy shares declined 7% as the price of crude slipped. Financials were weak, natch, with Citigroup, the day's most active stock, losing 30 cents to close at $1.20. General Electric, which slashed its dividend last week, lost another 92 cents to close at 7.50. Even safer stocks, like drug maker Pfizer, took a beating, losing 5.3% to close at $11.66.
So at what point do these superlow prices become a buyers' market? At Goldman Sachs, chief investment strategist David Kostin opined last week that stocks would finish the year higher than they are today perhaps as much as 20% higher but he also noted that the S&P 500 could bottom well below today's levels.
The decision before investors, many badly battered, is not an easy one. Stocks are cheaper, but their investment portfolios are likely thinner. Eric Bjorgen, an analyst at Leuthold Group in Minneapolis, notes that in face of low prices but a very uncertain near-term future, an investor's patience should be the determining factor: "This is a market only for those with a multiyear time horizon."