No end in sight

By Don Shilling

Stock markets probably haven’t hit bottom despite Monday’s big plunge, experts said.

No one can be sure of where the bottom is, but prices appear like they will trend even lower, said David Vera, an assistant professor of economics at Kent State University.

Investors have lost confidence after the collapse of Wall Street investment banks and the refusal by Congress to approve a $700 billion bailout plan, he said.

Peter Chen, an associate professor of finance at Youngstown State University, said he expects a total drop of about 1,000 points in the Dow Jones industrial average if Congress doesn’t pass a plan.

On Monday, the Dow plunged 777.68 points, or 7 percent, in the largest single-day point drop in U.S. history after the House of Representatives failed to OK the plan. The drop pushed the Dow’s losses for the year to 22 percent. Leaders in Congress are expected to vote on the issue again.

Watch out for a bad recession if Congress doesn’t act, Chen said.

He expects a recession even with a bailout plan because banks will be tightening credit standards, which will make it harder for businesses to borrow money and keep operations running. Without a bailout plan, he expects one of the worst recessions the country has endured, on par with one in 1974-75.

“It’s not going to be as bad as the Great Depression, but it will be very scary,” he said.

Many businesses need access to credit or they will have to shut down operations, he said. Those closings will ripple throughout the economy as customers and suppliers are affected, he said.

On the positive side, Vera noted the central banks in the U.S. and other countries took moves to ensure there is money available in the financial markets.

He noted, however, that the crisis could grow worse if banks become concerned that depositors will start withdrawing their money in large amounts. To make sure they can handle those withdrawals, banks might cut back on their lending, which would hurt the economy even further, he said.

Chen said the average person has no reason to be concerned about bank deposits because they are insured by the federal government up to 100,000. But corporations and government agencies have larger deposits they may want to withdraw, he said.

David Bennett, senior vice president at Butler Wick & Co. in Youngstown, said clients with large bank accounts have been calling to ask if their bank deposits are safe.

Monday was a particularly busy day at the stock brokerage, he said. Some investors are looking to buy bargains, while others are deciding to wait until prices settle before they decide what to do, he said.

Others are looking to sell their stocks and invest in something safe, such as certificates of deposit.

“Some people want to get out when the water is going over the waterfall,” Bennett said.

Both university professors said they expect recent losses to push some investors out of stock markets for good.

“People are going to be scared,” Chen said.

After looking at declining values in their 401(k) accounts and the collapse of the investment banks, many people will say they have had enough with stock investments, he said.

Vera said this year’s drops have been quite a shock for people who started investing in stocks and mutual funds in the 1990s when values were going up 15 percent to 20 percent a year, Vera said.

“You didn’t even understand what was going on, but you knew that at retirement you were going to have the funds. Now, that’s not the case,” Vera said.

He expects bank savings accounts and certificates of deposit, bonds and money market mutual funds to become more popular.

Chen suggests investors consider U.S. Treasury bonds that are known as I bonds. They pay a set amount of interest, plus an inflation rate that’s adjusted every six months.

Chen, however, warned against abandoning the stock market for long-term investing. Someone in their 20s, for example, could be missing a good opportunity to invest at low prices, he said.

“I’m optimistic about the long-term future of the stock market and the American economy,” he said.

But what is long term?

Chen said that he’s certain that stock market values will be higher in 10 or 15 years. But the values in two years are harder to predict, he said.

He suggested that people who are close to retirement be safe in their investments.

shilling@vindy.com