One year and -4,906 points later
A year ago, risk-taking sent the Dow to its highest peak ever. But even experts were blindsided by the dramatic decline
By CARRIE MASON-DRAFFEN
Newsday
Oct. 8, 2008, 11:53PM
What a difference a year makes.
A year ago today, the Dow Jones Industrial Average reached its highest level ever, 14,164.53 points.
But after a spate of financial earthquakes including the current credit crunch and the need for a $700 billion government rescue package, the Dow, not surprisingly, is headed in the opposite direction.
Monday it closed below 10,000 for the first time in four years, at 9,955.50, down nearly 370 points. Tuesday, it continued that slide, closing at 9,447.11, down more that 500 points, then dropped another 189.01 points on Wednesday to close at 9,258.10.
All told, the Dow has fallen more than 30 percent from last year's all-time high.
The Dow's dramatic drop and the economy's spectacular downturn were hard to call, some experts said, because, unlike the tech bust that was limited to extraordinary risk-taking in one sector, the downturn involves several areas: the mortgage industry, credit markets, banking and the stock market. And some financial planners believe this market more than ever demands that people rely on a balanced portfolio to weather the storm.
But risk-taking drove the Dow to its record highs.
"Everybody was looking for returns," said Jay Dahya, associate professor of finance at Baruch College in Manhattan. "If you are looking for returns, you are willing to take the risk without really understanding it."
'Experts were wrong'
He said the current economic debacle was so hard to call that most economists last year were predicting the U.S. would skirt a recession because of a booming export business fueled by the dollar's fall against other currencies, which made American products cheaper overseas.
"Ninety percent of the experts were wrong," he said.
The subprime mortgage problem that was laid bare by a decline in home values developed into a much broader credit crisis that toppled giant banks and financial institutions.
Raphael Soifer, who now runs his own consulting business and worked for the Manhattan investment bank Brown Brothers Harriman, said he didn't foresee the magnitude of the problems in banking and the credit markets, but some signs late last year pointed to a shaky economy for 2008.
The mortgage industry was weak and interest rates that banks charged each other for loans were rising, he said. A higher rate indicates banks are skittish about lending.
"I was reasonably nervous," he said. "There were bad signs."
And he said, a Harvard MBA index he devised in 2000 signaled an overheated economy in 2007. If 30 percent or more of a Harvard Business School graduating class is hired by Wall Street, that is a sign that the securities firms are "laying out big bucks," an indication the market may be near its peak, he said. The class of 2007 set a record of 40 percent, he said.
The altered landscape has changed what clients are demanding of financial advisers and what advisers counsel.
Ellen Douglas, a financial planner in Roslyn, N.Y., said that a year ago she had to talk some clients out of buying full tilt into the rising stock market, despite her advice to build a balanced portfolio of stocks, bonds and other investments. "I had to remind them of the tech explosion and that the biggest hogs get slaughtered," she said.
Despite the drop in the market, she tells people who are 10 or more years away from retirement to take advantage of the cheaper stock-buying opportunities right now. For those five or fewer years away from retirement, her message is different,
"Sit by the wayside, and invest in bonds," she said.
Roy Williams, a founding partner and chief executive of Prestige Wealth Management Group, a Pennington, N.J., firm that advises high-net worth clients, said he also advocates a balanced portfolio.
Last year when the Dow was rising, he told clients it was still important to have the right allocation of stocks to bonds. "History shows that you cannot time the markets," he said. "What's important is that you have the appropriate allocation."
Liquid funds
He believes it's important for clients to remain in the market, but they should have at least two years' worth of liquid funds in cash or short-term CDs to help them ride out the current volatility. "If not, they can be forced to sell assets at a discount price," he said.
Most experts don't see a recovery in the stock market until there's greater stability in the housing market, banks are lending freely and employment rises.
The broader Standard & Poor's 500 index also reached a record high a year ago, hitting 1,565.15 on Oct. 9, 2007. On Wednesday it closed at 984.94.
This bear market — a term often defined as a prolonged drop in stock prices of 20 percent or more — already is harsher than most of the 10 bear markets since the 1930s. Those have lasted an average of about 16 months from peak to trough, with average stock losses of 31 percent, based on S&P data.
Since the record 83 percent plunge in 1929-32, the current market is exceeded only by the drops of 49 percent in 2000-02 during the tech stock implosion and 48 percent in 1973-74 amid a recession and energy crisis.
The Associated Press contributed to this report.
A year ago, risk-taking sent the Dow to its highest peak ever. But even experts were blindsided by the dramatic decline
By CARRIE MASON-DRAFFEN
Newsday
Oct. 8, 2008, 11:53PM
What a difference a year makes.
A year ago today, the Dow Jones Industrial Average reached its highest level ever, 14,164.53 points.
But after a spate of financial earthquakes including the current credit crunch and the need for a $700 billion government rescue package, the Dow, not surprisingly, is headed in the opposite direction.
Monday it closed below 10,000 for the first time in four years, at 9,955.50, down nearly 370 points. Tuesday, it continued that slide, closing at 9,447.11, down more that 500 points, then dropped another 189.01 points on Wednesday to close at 9,258.10.
All told, the Dow has fallen more than 30 percent from last year's all-time high.
The Dow's dramatic drop and the economy's spectacular downturn were hard to call, some experts said, because, unlike the tech bust that was limited to extraordinary risk-taking in one sector, the downturn involves several areas: the mortgage industry, credit markets, banking and the stock market. And some financial planners believe this market more than ever demands that people rely on a balanced portfolio to weather the storm.
But risk-taking drove the Dow to its record highs.
"Everybody was looking for returns," said Jay Dahya, associate professor of finance at Baruch College in Manhattan. "If you are looking for returns, you are willing to take the risk without really understanding it."
'Experts were wrong'
He said the current economic debacle was so hard to call that most economists last year were predicting the U.S. would skirt a recession because of a booming export business fueled by the dollar's fall against other currencies, which made American products cheaper overseas.
"Ninety percent of the experts were wrong," he said.
The subprime mortgage problem that was laid bare by a decline in home values developed into a much broader credit crisis that toppled giant banks and financial institutions.
Raphael Soifer, who now runs his own consulting business and worked for the Manhattan investment bank Brown Brothers Harriman, said he didn't foresee the magnitude of the problems in banking and the credit markets, but some signs late last year pointed to a shaky economy for 2008.
The mortgage industry was weak and interest rates that banks charged each other for loans were rising, he said. A higher rate indicates banks are skittish about lending.
"I was reasonably nervous," he said. "There were bad signs."
And he said, a Harvard MBA index he devised in 2000 signaled an overheated economy in 2007. If 30 percent or more of a Harvard Business School graduating class is hired by Wall Street, that is a sign that the securities firms are "laying out big bucks," an indication the market may be near its peak, he said. The class of 2007 set a record of 40 percent, he said.
The altered landscape has changed what clients are demanding of financial advisers and what advisers counsel.
Ellen Douglas, a financial planner in Roslyn, N.Y., said that a year ago she had to talk some clients out of buying full tilt into the rising stock market, despite her advice to build a balanced portfolio of stocks, bonds and other investments. "I had to remind them of the tech explosion and that the biggest hogs get slaughtered," she said.
Despite the drop in the market, she tells people who are 10 or more years away from retirement to take advantage of the cheaper stock-buying opportunities right now. For those five or fewer years away from retirement, her message is different,
"Sit by the wayside, and invest in bonds," she said.
Roy Williams, a founding partner and chief executive of Prestige Wealth Management Group, a Pennington, N.J., firm that advises high-net worth clients, said he also advocates a balanced portfolio.
Last year when the Dow was rising, he told clients it was still important to have the right allocation of stocks to bonds. "History shows that you cannot time the markets," he said. "What's important is that you have the appropriate allocation."
Liquid funds
He believes it's important for clients to remain in the market, but they should have at least two years' worth of liquid funds in cash or short-term CDs to help them ride out the current volatility. "If not, they can be forced to sell assets at a discount price," he said.
Most experts don't see a recovery in the stock market until there's greater stability in the housing market, banks are lending freely and employment rises.
The broader Standard & Poor's 500 index also reached a record high a year ago, hitting 1,565.15 on Oct. 9, 2007. On Wednesday it closed at 984.94.
This bear market — a term often defined as a prolonged drop in stock prices of 20 percent or more — already is harsher than most of the 10 bear markets since the 1930s. Those have lasted an average of about 16 months from peak to trough, with average stock losses of 31 percent, based on S&P data.
Since the record 83 percent plunge in 1929-32, the current market is exceeded only by the drops of 49 percent in 2000-02 during the tech stock implosion and 48 percent in 1973-74 amid a recession and energy crisis.
The Associated Press contributed to this report.
