The Dow Jones Industrial Average suffered its biggest one-day loss ever and the Standard & Poor’s 500 stock index plummeted more than 8%—its steepest intraday decline in more than two decades—on news of the House of Representatives’ rejection of the $700 billion bailout package.
All told, U.S. stocks lost $1.1 trillion in market value, according to Bloomberg. The S&P 500 fell 8.4%, the most since Oct. 26, 1987, to 1,111.18. The Dow fell 778 point, or 7%, to 10,365.45. Meanwhile, the MSCI World Index of 23 developed markets sank as much as 6.8%, the steepest decline in the measure’s 38-year history.
Reaction from finance experts was swift.
“I’m astonished,” said Lyle Gramley, a senior economist at the Stanford Group and a former Federal Reserve governor. “The vote shows a total, utter lack of responsibility…[Congress] turned their back on a possible solution.”
Donald Nesbitt, chief investment officer of Chicago-based Ziegler Capital Management, which runs $3.2 billion, said that “the markets made their votes, loud and clear on the bailout proposal,” after the Dow Jones industrial average dipped more than 700 points on news that the rescue plan had been rejected in the House.
“This is a real crisis that requires decisive action from the government,” he said. “This is a battlefield situation. The market is asking for some form of triage as soon as possible just to stop the bleeding—and without some sort of action, it will only get worse.”
Mr. Nesbitt and others predicted that the equity markets could continue to decline significantly—perhaps another 10% to 15%—until some resolution is reached.
“There is little doubt that this bailout will be repackaged so members of Congress can go back to their constituents with something more palatable,” said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co., which manages roughly $120 billion. “What it will be, and when that will be, however, is anyone’s guess.”
Another vote isn’t likely to take place until Wednesday at the earliest, with the Jewish holidays starting tonight, meaning the markets will continue be consumed by uncertainty for at least another 48 hours.
“The markets have been, and will continue to be trading on fear for the time being,” Mr. Ezrati added. “Fundamentals are not the issue, as this is largely a crisis of confidence.”
So much so, that even if a bailout proposal is finalized in the near-term, it may be just a temporary stopgap for the markets’ bleeding.
“The bailout will confront the symptoms of the problems here, but it does not get to the core issue,” said Peter Schiff, president of Euro Pacific Capital. “Collectively, we have borrowed more money than we can pay back and the markets have become incredibly overvalued.”
This, Mr. Schiff argues, will soon begin to erode earnings for corporations, as their domestic operations will likely be negatively impacted by both the increased cost of borrowing, as well as a decline in consumer demand. “The bottom line,” he added, “is we could be on the brink of a major collapse, bailout or no bailout.”
In fleeing the equity markets, investors opted for a familiar landing spot—Treasury securities—pushing yields on the safest of safe havens ever lower. Three-month treasuries tumbled as low as 0.32%, down from 0.87% on Friday, while the 10-year Treasury note fell to 3.63% from 3.85%.
“Things develop, and fall apart, so quickly in these markets, that there are few parties investors have confidence in,” said Terry Burnham, portfolio manager and director of economics at Boston-based Acadian Asset Management. “Yet, ironically perhaps, when it comes to where they want to put their money right now, the entity that people can trust the most is the U.S. government.”
Meanwhile, U.S. Treasury Secretary Henry Paulson will use “all the tools at our disposal’” to protect financial markets after the House’s rejection of his $700 billion rescue plan, his spokeswoman said.
“The Secretary will be consulting with the President, the Chairman of the Federal Reserve, and Congressional leaders on next steps,” Treasury spokeswoman Michele Davis said in a statement released in Washington. “In the meantime, we stand ready to work with fellow regulators and use all the tools at our disposal, as we have over the last several months, to protect our financial markets and our economy.’”
The House voted 228 to 205 against giving Mr. Paulson the authority to buy troubled assets from financial companies, in what would have been the biggest government intervention in the markets since the Great Depression.
