Questions and answers about the stock-market fall
August 4, 2011 (WPVI) -- Fears of another global recession on Thursday sent the stock market into its steepest dive since the 2008 financial crisis.
The Dow Jones industrial average plunged more than 500 points, erasing its gains for the entire year. Stock indexes have sunk in nine of the past 10 trading days. Here are some questions and answers about what's happened and what it means:
Q: What triggered so much anxiety across the financial markets Thursday?
A: In Europe, worries mounted that Italy and Spain won't be able to pay their bills, the latest shudder in a debt crisis that has gripped the region. The European Central Bank restarted a bond-buying program to calm credit markets. But it had the opposite effect on stocks and other investments, highlighting concerns about a worsening global economy. Investors were also jittery about July jobs data the U.S. government will release Friday.
Q: Could falling stock prices weaken the economy?
A: Yes, by making people less likely to spend - and companies less likely to hire. Lower stock prices tend to slow spending as people see their wealth shrink. And consumer spending drives about 70 percent of the economy. When spending slows, job growth typically does, too.
Q: Other than the massive selloff, have there been any unusual signs of distress?
A: Bank of New York Mellon said it will charge a fee to pension funds and other large customers that want to hold cash deposits over $50 million. Similarly, the yield on the one-month Treasury bill fell to almost nothing - 0.008 percent. Normally, banks and the U.S. government pay people interest for their money. But many large investors have grown so anxious that, above all, they want to invest their money in ultra-safe ways.
Q: How bad is this selloff compared with the one after the 2008 crisis?
A: The Standard and Poor's 500 stock index fell 57 percent from its October 2007 peak to March 2009. So far, the S&P has fallen 12 percent from its highs last spring. Analysts say corporations are healthier and better able to endure an economic slump than they were three years ago. Earnings for the second quarter are still on pace to post a record high.
Q: What's an average investor to do?
A: Stick with your long-term plan. Responding emotionally to short-term movements in the market is usually a bad idea and results mostly in locking in losses. But be practical about protecting yourself from the worst-case scenario if you face big cash needs in the next few years for college, retirement or other pressing demands. Stock allocations should be tailored for your goals and risk tolerance.
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