Wall Street sell-off not all bad news

The US sharemarkets dived soon after reopening despite the Federal Reserve slashing interest rates 50 basis points (the eighth cut this year) in an effort to reassure investors. In a surprise move, the European Central Bank also cut rates by the same amount.

At close the Dow Jones Industrials Average was down 7.1%, the S&P 500 was down 4.9% and the Nasdaq down 6.8%. While the percentage point drop in the DJIA was not large enough to invoke the circuit-breaker as was feared, it was the largest point drop within one day. Volume of shares traded was a reported 2.3 billion, more than the largest record volume of 2.1 billion (Jan 4 2001).

Today’s sell-off erased US$591.2 billion from the value of US stocks.

It was a broad sell-off affecting most sectors. Major sector activity as follows:

• Hardest hit sectors were airlines, with the Amex Airline index falling 39%. Weakness in airline stocks sent the Dow Jones Transportation Average 13% lower. Financials and Insurers also suffered. American International Group (AIG) fell along with the world’s most valuable company, General Electric.
• Technology and retailer stocks also suffered as investors speculate that the assault will tip the economy into a recession. However, even without Tuesday’s attack, investors had reason for wariness. Consumer sentiment tumbled last week while jobless claims surged. Industrial production fell for an 11th straight month in August, a month when the unemployment rate jumped to a four-year high.

• The day did, however, hold some positives:

• The Fed’s latest rate cut took the overnight lending rate between banks to its lowest levels since early 1994.

• Encouraged by the SEC, a growing list of companies including Intel and Starbucks commenced share buybacks.

• Some of the telecom stocks looked stable with the flight to safe havens. Teleconferencing product maker Polycom gained, as did ACT Teleconferencing. Data storage backup company Sungard Data Systems also rose – analysts predicted a general gain in security related stocks.
• Mining companies and defence contractors also rose.
• Other indexes performance:

While this volatility was not unexpected, we need to keep in mind that this is only one day of trading after major disruption. The Fed and the ECB stand ready to make further rate cuts if needed, and history has shown that there is reasonably rapid recovery from events such as this.

Commentators are advising not to act precipitously.

Tower Managed Funds expects to start updated pricing for international funds currently not priced by tomorrow – Wednesday 19 September.