Stocks Drop Broadly in “Flight to Safety”

Stocks fell sharply Thursday as investors reacted to gloomy U.S. economic reports and fears about the stability of European banks by dumping equities in favor of safe haven assets such as U.S. Treasuries. The Dow Jones Industrial Average dropped 419.63 points, or about 3.68%, while the broader S&P 500 Index declined 53.24 points, or 4.46%, and the tech-heavy Nasdaq index fell 131.05, or 5.22%. The decline followed similar slumps in Europe, where investors dumped bank stocks and sent major indices down by 4% to 6%.

The so-called “flight to safety” drove yields on the benchmark 10-year Treasury note briefly below 2% before closing at 2.085%. Yields on fixed income investments fall as prices rise, and the demand from investors seeking safety for their assets pushed yields on the 10-year Treasury note down to levels last seen in the 1950s.

Investors were initially alarmed by reports that U.S. federal and state regulators are concerned about the U.S. divisions of major European banks and the possibility of a spillover of European debt problems into the U.S. banking system. Those fears were exacerbated by several negative reports concerning the U.S. economy. An August survey of manufacturing in mid-Atlantic states plummeted to a negative reading of -30.7, a sharp reversal from a positive 3.2 in July and the lowest point in two years. Also discouraging investors were new figures on initial jobless claims, which rose more than analysts had expected, and a Labor Department report that consumer prices rose in July at the fastest rate in four months. Meanwhile, existing-home sales fell 3.5% in July, dampening hopes for a rebound in the housing sector.

Although investors are clearly worried that the current financial turmoil might lead to a repeat of the 2008/2009 financial crisis, it’s important to remember that things are very different today. U.S. financial institutions are much stronger, with one-third more capital than they had going into that situation and reduced levels of lending risk. U.S. corporations are also much stronger, with record balance sheets and positive earnings reports that are exceeding analyst expectations. Neither our chief economist, Dr. Scott Brown, nor our chief investment strategist, Jeff Saut, believes we are headed into a recession.

Abrupt changes such as those we are experiencing in the markets can be unnerving. Raymond James recently released a video in which the company’s chief executive officer, Paul Reilly, discusses the current situation and provides insightful suggestions on how investors should react. The video is available on the Raymond James website, and I recommend that you watch it. In addition, if you would like to discuss your portfolio or have any concerns about your overall financial plan, I am of course available to you. Please give me a call.

Steve Crabtree, CFP® Senior Vice President Investments Contact Us