Error Likely Responsible for Thursday's Market Plunge

Published: May 7th 2010
in Economics » Local

Dow Jones
Pic: wikimedia commons

On Thursday, at 2:46 p.m. the Dow had fallen almost 1,000 points compared to noon. A couple of minutes passed before it returned to the level of trade that it was on before. Was it an error only? Graham A. Mayes, Senior Vice President EFG Wealth Management (Canada) Ltd., believes that it does appear certain that some type of error brought about yesterday’s terrible gyrations in the market.


However, he emphasizes that we should focus on a different angle. “I think the bigger story here may be investor psychology and although many have succumbed to the belief that we have returned to some degree of some degree of normalcy, the world is still in a precarious spot.”


He noted that there are major factors that effect the situation and involve the developed nations and the enormous mountains of debts that must somehow be addressed. On the personal perspective Mayes focuses on the human tendency to look for a comfort zone even though we are not there yet. “Complacency has a nasty way of sneaking back into our daily routines once a crisis is perceived to have passed leaving ourselves open to making similar mistakes made within portfolios in the past. Of course this stands to reason when collectively global markets have recouped a significant portion of lost value since 2007.”


He emphasized that EFG remained vigilant coming into 2010, subjecting all portfolios to rigorous and timely “tune-ups” so as to provide optimal returns for a client’s desired market risk.


Investors are increasingly anxious that Greece’s debt crisis will spread to other countries and don’t want to see a repeat of the same scenario as winter 2008. Mayes looked at the Global equity market value that was devastated in 2008 but still has not gone back to where it was before the crisis.


“Total stock market capitalization at the end of 2007 was $60.9 trillion (USD) dropping to only $32.1 trillion at the end of 2008 - an unprecedented erosion of world wealth levels. While gains in 2009 have restored a considerable amount of wealth around the globe, global stock market values ended 2009 at $46 trillion USD. Clearly that two year drop from 2007 to 2009 of $15 trillion USD, or about 25 per cent, remains a monumental and persistent problem for all investors.”


As many financial advisors will say that nothing is for certain in today’s markets, Mayes examined yesterday’s plunge and resulting panic to prove there remains an underlying tone of doubt and uncertainty about the strength and viability of the economic recovery.


“Whether yesterday’s sell-off was precipitated by  an error or not, prior to the trigger, stocks had been subjected to a degree of liquidation due to fears about the Greek debt woes and those of other European countries so in essence a underlying decline  was already evident,” said Mayes, noting that yesterday’s plunge just added gravity to the situation.

Related articles: (dow jones, stock market, EFG)

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