Skip to main content

The Wall Street Panic of 2008
By Todd Wenning
September 4, 2008
Comment (33)
Recommend (62)

Panic: In economics, acute financial disturbance, such as widespread bank failures, feverish stock speculation followed by a market crash, or a climate of fear caused by economic crisis or the anticipation of such crisis.
-- Britannica Online

Make no mistake -- by this definition, what we've witnessed so far in 2008 is nothing less than a global market panic.

Acute financial disturbance? Freddie Mac and Fannie Mae (NYSE: FNM) imploded. Bear Stearns got "rescued." There was a formal bank run on IndyMac.

Feverish speculation followed by a crash? Chinese stocks are down more than 50% year to date and many other global markets have effectively crashed. Oh yeah, and the housing bubble burst.

Climate of fear? U.S. investor sentiment is at record lows. No one seems to know where the next shoe will drop.

The list, sadly, could go on.

Don't panic
Of course, no one wants to call this a market "panic." Instead, in most places it's been labeled a "crisis." In fact, the term "panic" hasn't been widely used to describe a market since the Panic of 1907 -- which is unfortunate, because understanding this as a panic has something to teach us.

In the 19th century (the high time for market panics), Yale professor William Graham Sumner defined a panic as "a wave of emotion, apprehension, alarm. It is more or less irrational. It is superinduced upon a crisis, which is real and inevitable, but it exaggerates, conjures up possibilities, takes away courage and energy."

In other words, the subprime and credit mess is the "crisis" and the "panic" is the exaggerations and doom-and-gloom language that comes with it. We've seen plenty of that in recent months. The major news networks have likened our current economy to the Great Depression more than 70 times in the first six months of 2008. So, please, let's call this market by its proper name: the Panic of 2008.

Fortunately, "A panic," Sumner continued, "can be partly overcome by judicious reflection, by realization of the truth, and by measurement of facts."

Let us be judiciously reflective
So what do the panics of the early 20th century tell us about how we might overcome this one?

The last official panic -- the Panic of 1907 -- shook the U.S. economy to its core. Wall Street brokerages failed, depositors ran on banks, well-known companies went under, and the market's liquidity was in question. (Sound familiar?) In this instance, J.P. Morgan and friends famously put together $25 million to keep the market afloat -- a role now occupied by the Federal Reserve. By 1909, the Dow Jones index had more than recovered from pre-panic highs.

In 1914, the year the Great War began in Europe, the U.S. stock markets actually closed for nearly four months after foreign investors began pulling their money out of U.S. equities en masse to support the war effort. When it reopened, the market was devalued about 30%, but sustained rallies doubled that opening by the end of 1916.

Then, of course, came the Great Depression -- the single most important economic event in U.S. history -- which began with the Crash of 1929 and lasted arguably until the U.S. entered World War II in 1941. In 1932, unemployment hit 24.9%, and more than 9,000 banks failed during the 1930s. And there were no federally insured deposits until the Banking Act of 1933 created the FDIC, so when the bank failed, your money went with it. In fact, Wall Street's very future -- not to mention the economic model of capitalism -- was in question.

For those investors who had both the money and the courage to invest in the 1930s, it paid off. One man famously borrowed money to buy 104 U.S. stocks trading for less than $1 a share in 1939. Talk about investing at the point of maximum pessimism! Four years later, though, his money had quadrupled. His name, of course, was John Templeton.

OK, what's your point?
Judicious reflection, realization of the truth, and measurement of facts all say the same thing: We've seen markets like today's before -- and some far worse. And in every case, the point at which the market has turned irrational or overly pessimistic is precisely the time we long-term investors should have bought equities.

Despite the headlines proclaiming the next Great Depression, this is no Great Depression -- only a panic helped along by the short-term mind-set of the financial industry. Financial media's job is to attract readership by sensationalizing news events, and financial institutions, which are built on commissions and fees, want to keep money moving in and out in order to bulk up their own revenues, and so they fan the flames of panic.

Individual investors like us do not have the advantage versus Wall Street when it comes to short-term trading, but we do have longer time horizons. Wall Street focuses on minutes, hours, and days, while we focus on years and decades. And that's what makes their panics a good time for us to buy.

Let's take the most modern example of market irrationality -- the dot-com bubble and subsequent burst -- and see what's happened to some quality names since the S&P 500 was near its low in September 2002.

Company


Returns (9/30/2002-Present)

McDonald's (NYSE: MCD)


250%

Best Buy (NYSE: BBY)


209%

Hewlett-Packard (NYSE: HPQ)


286%

Caterpillar (NYSE: CAT)


264%

Nike (NYSE: NKE)


187%

Chevron (NYSE: CVX)


196%

Data provided by Capital IQ.

You didn't need to be a market genius to invest in these names in 2002. They were all well known to both consumers and investors. All six had been beaten down considerably by the bear market, though, and that downturn presented investors with excellent opportunities to buy great companies at great prices.

Ironically enough, however, the third quarter of 2002 had the fewest equity-based mutual fund assets of the entire postdot-com bust. Put simply, investors bailed on the market at exactly the wrong time.

It's still scary
Don't get me wrong, some of the financial headlines we've seen over the past few months are downright frightening. But it's important to not join the panic and to keep a long-term perspective on market panics, booms, crises, and everything in between.

At our Motley Fool Stock Advisor investing service, Fool co-founders Tom and David Gardner had a lot of success picking up great companies during the postdot-com bust. Their long-term focus helped them add names like Amazon.com at a time when the market wanted nothing to do with them -- and their picks are beating the market by 43 percentage points on average.

They're taking a similar approach now, and count top brand names such as Starbucks among their "best buys" right now. To see what else they're recommending, take a free, 30-day trial. Click here to get started -- there's no obligation to subscribe.

Todd Wenning panics at the sight of clowns, but at little else. He does not own shares of any company mentioned. The Fool, on the other hand, owns shares of Best Buy, which is a Motley Fool Inside Value and a Stock Advisor pick. The Fool also owns shares of Starbucks, which is a Stock Advisor and an Inside Value pick. Amazon is a Stock Advisor recommendation. The Fool's disclosure policy keeps a steady hand.

http://www.fool.com/investing/general/2008/09/04/the-wa...t-panic-of-2008.aspx

Replies sorted oldest to newest

Thursday, September 18, 2008
WASHINGTON NEWS
Panic Sweeping Wall Street May Leave No One Standing
The credit crisis on Wednesday threatened to drag down Wall Street banks Morgan Stanley and Goldman Sachs. The Washington Post reports shares of the firms "tumbled as fears mounted that the two most-vaunted names in investment banking could fall victim to the credit crisis." The New York Times says on its front page, "Even Morgan Stanley and Goldman Sachs, the two last titans left standing on Wall Street, are no longer immune," underscoring "how quickly a sense of fear is spreading through Wall Street."

Media reports this morning paint a particularly dire picture of the immediate prospects for the US financial system. The New York Times reports "the financial crisis entered a potentially dangerous new phase on Wednesday when many credit markets stopped working normally as investors around the world frantically moved their money into the safest investments, like Treasury bills." Similarly, the Financial Times says "the panic in world credit markets reached historic intensity on Wednesday, prompting a flight to safety of the kind not seen since the second world war." The Wall Street Journal reports, "Fear coursed through the US financial system on Wednesday, as hope for a resolution to the year-old credit crisis faded." Another Wall Street Journal story was titled "Worst Crisis Since '30s, With No End Yet In Sight." The Wall Street Journal, Christian Science Monitor, Washington Post and McClatchy run additional analyses on the crisis.

Fed "Stretched To Its Limits" The New York Times reports on its front page, "The mighty Federal Reserve is being stretched to its limits, both in the range of problems it is being asked to fix and in its financial firepower." The central bank "has also transformed itself almost overnight into the Fed Inc. by essentially taking over American International Group after already taking on hundreds of billions of dollars in mortgage securities to help ailing financial institutions."

The Washington Post reports "the Federal Reserve has requested that the Treasury Department deposit $40 billion with the central bank in an effort to help the Fed continue to stabilize the financial markets and address concerns about whether it is overstretched." Under the headline "US Moves To Bolster Fed Balance Sheet," the Wall Street Journal reports "the Treasury, responding to worries that the Federal Reserve could be running out of financial ammunition to deal with the credit crisis, moved to reload the Fed's gun with $100 billion worth of bullets."

Washington Mutual Considers Sale The Wall Street Journal reports, "Washington Mutual Inc. is accelerating efforts to raise more capital or potentially sell itself, reaching out to potential suitors and instructing its investment bankers to step up their efforts to help the struggling thrift escape its mortgage woes." The Journal adds, "The push got another boost Wednesday when private-equity firm TPG, which led a $7 billion infusion at WaMu in April, gave the Seattle company an important concession that will make it easier to attract additional cash." The AP says "ailing bank Washington Mutual Inc. appeared headed toward a sale Wednesday after a major investor removed a potential stumbling block and nervous banking regulators began approaching the most logical buyers."

Dow Falls 449 Points. The AP reports, "The stock market took another nosedive Wednesday as the American banking system appeared even shakier and investors worried that the financial crisis is spinning so far out of control that even government rescues can't stop it." The Dow "fell 449.36 to 10,609.66, finishing near its lowest point of the trading day. The index is down more than 7 percent just this week and more than 25 percent since its record close less than a year ago, on Oct. 9, 2007. The Los Angeles Times notes "the Standard & Poor's 500 index dropped 57.20 points, or 4.7%, to 1,156.39," and "the Nasdaq composite index slid 109.05 points, or 4.9%, to 2,098.85."

23% Believe Economy In "Depression" USA Today, in a story titled "Across The USA, Anxiety Rises About What's Ahead," reports, "Nearly one-quarter of adults -- 23% -- believe the US economy is in a depression, according to a USA TODAY/Gallup Poll taken Monday and Tuesday. That's nearly double the 12% who said so in February." While "people haven't lost hope," and "nearly half -- 47% -- say they expect the US economy to be growing a year from now, "concerns are increasing."
FM

Add Reply

×
×
×
×
×
Link copied to your clipboard.
×
×