Fears of a double-dip recession, the expiring money-printing program called “Quantitative Easing II,” the specter of government spending cuts, and a widely anticipated downgrade of U.S. government debt have sent equity markets into a major downward spiral that culminated in a 513 point drop in the Dow on Thursday, August 4, 2011, the largest single point drop since 2008, the year Bear Stearns and Lehman Brothers failed, the credit markets froze, and U.S. political leaders seemed genuinely frightened.
What makes things even more worrisome is the fact that the markets keep dropping even as second quarter corporate earnings are pretty good. The market may believe the positive earnings surprises are the result of cost cutting, which cannot continue indefinitely, rather than top-line revenue growth. “Dropping prices may create a chain effect as consumers curtail spending, further hindering the recovery” (“Markets crumble,” Atlanta Journal-Constitution, Aug. 5, 2011).
Investors rushing for safety have cashed in stocks, putting the money in FDIC-insured bank accounts that pay nothing and bidding up U.S. Treasuries, which paradoxically are weakened by the debt debacle and now extant credit downgrade. “The rush to safety was so great that the Bank of New York said it will charge some large depositors just to hold their money” (“Fear punches Dow down 513,” by Matt Krantz and John Waggoner, USA Today, Aug. 5, 2011).
A flight to safety that pays no return in not necessarily foolish, if it is truly safe. But is it? Investor attorney J. Boyd Page, the senior partner of Atlanta-based Page Perry, cautioned: “Investors have seen a tremendous drop in the stock market during the last two weeks. They need to be very careful because there are not a lot of safe havens. Despite the safety flight into them, U.S. Treasuries and bank accounts are not necessarily safe. Conventional wisdom is that the market price of U.S. Treasury securities must eventually decline as investors demand to be compensated for the increased risk of default. In addition, as we have seen, some banks fail, and FDIC insurance coverage is limited and may not cover 100% of very large deposits.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions.