Stock Market Tumbles: Dow Down 311 Points
Should Investors Sell or Ride It Out?
By EMILY FRIEDMAN and SCOTT MAYEROWITZ
July 26, 2007 —
The stock market opened down slightly today, following yesterday's huge sell off. Investors may be worried that a better then expected economic report released today may force interest rates higher. The Government said the economy in the second quarter grew at an annual rate of 3.4 percent, much better then expected.
The joy and jubilation that just last week sent Wall Street to record highs vanished Thursday as negative news about the housing market and rising oil prices hit home in a big way.
Adding to Thursday's big sell off was a growing inaccessibility of credit.
It all pushed major markets to close down in the second-worst day of trading this year.
The Dow Jones Industrials Average plunged 311 points, a 2.3 percent decline. The NASDAQ closed down 1.8 percent and the Standard & Poor's 500 fell 2.3 percent as the market became very nervous.
Stocks only did worse this year back on Feb. 27, when the Dow closed down 416 points and the NASDAQ dropped more than 96 points.
Since then, the markets have had a steady climb up, with the Dow topping 13,000 in April and then briefly crossing 14,000 last week.
Even after Thursday's dive, the Dow is still up more than 8 percent from the beginning of the year, when it stood at 12,480.69.
So does this mean that it's time to sell and limit losses?
Not at all, said Hugh Johnson, of Johnson Illington Advisors.
"The one mistake you make as an individual investor is get caught up in the day-to-day and hour-to-hour swings in the stock market. That's noise and it doesn't count," Johnson told ABC News. "It's important to recognize the underlying trend and they're still positive. But don't get caught up in the emotional signs of the market, because you will make mistakes."
In the short-run, the real impact is going to be felt by those looking to buy a home.
Lenders have been tightening standards and raising rates as more and more people -- including now some with good credit -- start to miss their mortgage payments.
"The mortgage terms will not be as generous as they were in 2004 and 2005, when they weren't only generous but also encouraged speculation," Johnson said.
Causes of the Sell Off
The big drop on Wall Street indicates that fear is finally setting in with investors.
"Today, we finally got to a level of energy prices that became shocking," said Art Hogan, an analyst at Jeffries and Co. "With oil spiking, we are finally taking notice and one of the biggest fears is that the residential real estate market is showing signs that it's getting worse and not better."
Hogan said the anticipated losses in both the housing and the oil markets were far lower than the actual trends, which has investors caught off guard.
"Last year, we saw $78.40 [a barrel] and that was shocking," said Hogan. "But the fact that we are nearly there this year, that's an issue."
Predictions for the housing market are another cause for concern; June is usually a "brisk" month for home sales.
"We had estimated that new home sales on a month-over-month basis would decline about 2.7 percent, but it's actually 6.6 percent," said Hogan.
So what, exactly, is driving the housing market down?
Simply put, people aren't paying their mortgages. As a result, the market is seeing an increase number of default mortgages.
"As housing prices come down, people who bought houses with the idea that the price would go up and up forever are getting squeezed," Johnson said. "Those speculators are losing money -- and what they're trying to do is sell houses they bought under their dreams at whatever price they can get. Many of them borrowed money to buy those houses and cannot pay their mortgages."
The problem intensifies when these speculators are using borrowed money to buy the assets, leading to lenders become increasingly more hesitant to do business.
"The problem in today's market is the borrowers are in trouble," said Michael Metz, a chief investment strategist from Oppenheimer & Co. "They borrowed money to buy assets that are declined in value and the lenders demand they put down more collateral. A lot of them can't afford more collateral so they're forced to sell."