It was a week to remember and forget on Wall Street, as the U.S. economy’s financial crisis intensified, sending investors scrambling for answers.
Lehman Brother declared bankruptcy, Merrill Lynch was rescued by Bank of America and the Federal Reserve Bank bailed out American International Group with $85 billion. And that was just Monday and Tuesday.
On top of that, the world’s oldest money market fund, the Reserve Fund, fell below $1 per share, becoming the first money market fund in 14 years to “break the buck.” The collapse of household names like Lehman and AIG and concerns about what is considered a safe investment like a money market severely eroded investor confidence, and it showed in the stock market.
The result was a 504-point loss for Dow Jones Industrial Average on Monday, followed by a 449-point loss on Wednesday.
“It’s unbelievable,” said Bill Stone, chief investment strategist for PNC. “People are just scared of everything.”
Investor fear even resulted in a 60-percent price drop in Constellation Energy Group’s shares, leading to the sudden $4.7 billion purchase of the Baltimore company by billionaire Warren Buffett’s MidAmerican Energy Holdings on Thursday.
The market rallied toward the end of the week, after the government stopped in with plans to rescue banks from billions of dollars in bad debt with expanded emergency lending. The Dow responded with gains of 410 points on Thursday and 368 points on Friday.
The market’s relative recovery, though, did little to calm investor and consumer worries.
“There’s going to be major financial news in the coming weeks,” said Amey Stone, editor of AOL Money & Finance.
“It doesn’t feel like the end is near in terms of the financial crisis,” she said. “We’ll see this volatility through the rest of the year.”
The challenge for the everyday consumer is to not become consumed with the headlines that involve the big names like Merrill Lynch or AIG, Stone said.
“The average consumer’s money isn’t going anywhere,” Stone said.
The reason being that retirement money invested with firms like Merrill Lynch is separate from any money the institution has invested, Stone said. So if a big financial firm goes under, you can feel assured that your money didn’t disappear with the company.
Also, money in bank accounts is insured up to $100,000 by the government, Stone said.
As far as retirement and 401(k) plans go, Stone pointed to last week’s severe market swings as evidence that investors can’t worry about the short-term.
“If you’re worried about your retirement savings, just remember that you’re investing for the long-term,” Stone said. “If investors panicked at the beginning at of the week, they might have sold at the bottom before the market came back.”
For the cautious investor, Stone recommends safer, stable investments like fixed-income bonds or treasuries.
The credit crunch that has toppled storied financial institutions will affect small businesses, but not in the way you’d expect.
“The question is, ‘What will it do to consumers?’ ” said Bill Dunkelberg, chief economist for the National Federation of Independent Businesses. “What matters to small businesses is one thing — customers.”
Dunkelberg maintains that while Wall Street institutions appear unwilling to lend to each other, “thousands of community banks are willing to lend to the nation’s small business owners.”
In fact, according to an NFIB survey of small businesses, only about 3 percent of companies surveyed reported “the cost and availability of credit” as their top business problem.
The real problem facing small businesses is how market swings and rising costs will affect consumer spending habits, Dunkelberg said.
At PNC, Stone and his investment team have a few “reasons for hope.”
Lehman’s collapse seems to have signaled the long-awaited wave of industry consolidation on Wall Street, the Fed appears poised to prevent the situation from getting worse, and the decline in mortgage rates might help housing affordability and home prices, Stone said.
“When panic is so widespread and selling pressure is so strong, it doesn’t take much of a spark to turn the tide,” Stone said.
