How low will it go?

Photo by: Robert K. Yosay

Photo

Flonnoya Franklin, president and CEO of FJF Wealth Management Co. in Youngstown, reflects on a disastrous day for the Dow Jones Industrial Average. The Dow lost 635 points, the sixth-worst single day since 1899.

By Karl Henkel

khenkel@vindy.com

YOUNGSTOWN

Analysts expect- ed mayhem in the markets Monday because of the nation’s newly downgraded credit rating.

Mayhem is what they got. And investors can expect more of the same today.

“People don’t know what to do,” said Brian Laraway, partner and vice president of Bury Financial Group in Poland. “It’s going to take a while to get back.”

After a two-week stretch that wiped out a year’s worth of economic gains, the Dow Jones Industrial Average continued its implosion, collapsing 635 points Monday. That’s the biggest loss since a 680-point drop Dec. 1, 2008.

Monday marked the sixth-worst day since 1899 for the Dow, which now has lost more than 1,900 points since July 21. It also was the first time the Dow closed below 11,000 since last fall.

The Dow finished at 10,809.85, a 5.5 percent decrease from Friday’s close.

Analysts pointed to multiple reasons for the historic drop, among them Standard & Poor’s decision to downgrade the nation’s credit rating from AAA to AA-plus, which sparked a 200-point drop at Monday’s open.

“This is all knee-jerk, reactionary,” said John Reese, president of Reese Financial Services in Boardman. “People see the downgrade as such a negative fear that everything is going to crash.”

Things worsened by midday with the news S&P also downgraded the credit ratings of Fannie Mae and Freddie Mac, which back housing loans.

Mae and Mac’s credit ratings also decreased from AAA to AA-plus because of their “direct reliance on the U.S. government,” S&P said.

The credit ratings drop was felt throughout other sectors, too.

Treasury yields dropped to their lowest level in three weeks. Despite S&P’s indication that Treasurys are a more risky investment, analysts say they still remain a safe bet.

“Your rate of return is next to nothing, but you have the protection,” Laraway said.

Closer to home, Farmers National Banc Corp., an over-the-counter stock, and First Place Financial Corp., on NASDAQ, saw losses that equaled or exceeded that of the Dow.

Even President Barack Obama couldn’t quell economic fears. Leading up to his midday speech, stocks continued to deteriorate.

The drop accelerated as he spoke, even as he declared America remained an “AAA” country.

Investors at home continued to sell, and the seismic effect was felt around the world.

George Zeller, a Cleveland-based economist, said it’s not America’s debt but the debt of the rest of the world that caused markets around the globe to post decreases.

“In Europe, they have a worse debt problem than we do,” Zeller said. “Then you’ve got the situation in Italy.

“It’s the whole question of the Euro and how they are going to deal with the debt issues.”

In Europe, Germany sunk 5 percent and France 4.7 percent.

Zeller also pointed to investors in Asian markets such as China and Taiwan, which like the rest of the world, also saw massive sell-offs.

Stock markets in Asia began Monday’s global rout. South Korea’s main stock index fell almost 4 percent, Japan’s nearly 2 percent.

The outlook for the world economy doesn’t look any better: With America’s downgrade came a negative outlook, which could mean another possible downgrade later this fall if the federal government cannot come up with a formidable deficit-reduction plan.

The Dow has been in a tailspin since July 21, the midst of the debt-ceiling and deficit-reduction debate that took over Washington. Since then, it has posted losses in 10 of 12 days, its worst stretch since the economic collapse of December 2008.

“We were lied to cheated and robbed by the lending institutions and the banks,” Reese said. “But they’ve both led to the same thing, which is fear.”

Analysts said the media’s sensationalistic angle to the debt, deficit and downgrade news has caused a panic among investors, many of whom are selling off stocks and losing money that they’ll never recover.

“At times like this, the investors who have the faith in the long term health of the market are the ones that make the best investments,” Reese said. “It’s buying when it’s low, not selling when it’s low.”