September, 2008: 30 days that rocked the world

September, 2008: 30 days that rocked the world

DAVID PARKINSON
Tuesday, September 30, 2008
Perhaps one day, they'll print it on T-shirts: I Went Through the September Wringer of 2008.
With a dizzying, dismal September finally behind the world's financial markets, investors are left surveying the carnage of the most volatile month for stocks in a generation. After a history-making month of failing banks, rescue plans and dashed hopes, investors find themselves looking at a Canadian market worth almost 15 per cent less than it was a month ago – and facing some difficult questions about what comes next.

Veteran market watchers note the markets have seen deeper turmoil over shorter time spans – most recently, the selloffs of October, 1987, and August, 1998, both of which saw 20-per-cent-plus declines.

But what is more worrisome this time is the underlying economic and credit landscape, which offers little support for stocks.

Unlike the plunges that were triggered by financial market woes but came in times of a generally solid underlying economy, this selloff has come amid a severe credit crunch and a global economy lurching toward recession.

“This is a more complicated situation. It has a lot more layerings,” said UBS Securities Canada chief economist George Vasic, a market veteran of nearly three decades.
Even after rebounding more than 450 points Tuesday, the S&P/TSX composite index finished the month down 14.7 per cent – its fourth-worst month since 1980, and its worst September since 1931. The month featured wild mood swings in which one-third of the trading sessions (seven of 21) featured moves of more than 3 per cent.

The end of September also caps a dismal quarter of credit woes and sinking commodity prices that fuelled a 19-per-cent slide in the S&P/TSX composite, its worst quarter in a decade. The index is down 22 per cent from its peak in June.

The month wasn't much kinder to U.S. markets. The S&P 500 fell 9.2 per cent, its third-worst September, and eighth-worst month, since 1950.

Sharp downward corrections in stock markets aren't as rare as many investors imagine. In the past decade alone, the Canadian market has had eight months with losses of more than 7 per cent.

“These things happen more often than people remember,” Mr. Vasic said. “The pain of the past doesn't sting quite as much right now, because you eventually recovered from that pain, but at this moment you're not sure if or when you're going to recover from the current situation.”

And, indeed, stocks have historically rebounded smartly from violent short-term slides. Merrill Lynch analyst Mary Ann Bartels noted that in six of the eight occasions the S&P 500 suffered losses equal to or greater than Monday's 9-per-cent plunge, stocks bounced back the next day and were still above those selloff lows a month later.

But with the global economy still slowing, complicated by the confusion surrounding credit and financial sector woes, this pullback may not follow the typical model.

“Even allowing for the U.S. recession, we do have the fact that U.S. consumers do need to de-lever themselves. So, that would appear to cement the prospects for a weak recovery,” Mr. Vasic said.
And the credit-fuelled turmoil in the global financial sector “is a feature that really hasn't been there in any of the postwar recessions,” he said.

Academics said Tuesday that although we're still in early days, September's events and their accompanying market turmoil could one day make up key chapters in economic and financial text books. The transformation in some of the world's biggest and most powerful financial institutions, government and central bank manoeuvrings and the gut-wrenching reconstruction of the world's credit system could provide valuable lessons for the global economy and financial system.

“This is not the end game, but it's the beginning of the end,” said economist Mahmoud El-Gamal of Rice University. “How the end game plays out really depends on whether there is an international level of co-operation on reconfiguring the international financial system, as well as specific sectors including the investment banks and the hedge funds.

“We don't really know how it's going to go.”
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