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| Personalize Ticker | Updated 4:02 PM, 10/1/2008 | Disclaimer | © MarketWatch Inc. Source: Interactive Data Corp |
Wednesday, October 1, 2008; 5:26 PM
The U.S. finanical crisis last month appears to have led to a major pullback by investors who withdrew billions of dollars from equity mutual funds and bonds, according to an analysis released today by a financial research firm.
During September, investors pulled $22 billion from U.S. equity mutual funds, compared with $2 billion in August, according to the data from TrimTabs Investment Research, which publishes detailed coverage of U.S. stock market liquidity. At the same time $24 billion was also withdrawn from bonds during September, the largest extraction in a single-month.
"Usually when people leave equities they go to bonds, this time they are leaving bonds as well. Because of the credit problems, they are worried about defaults on bonds, everybody is going to the safest forms of cash they can find," said Conrad Gann, president and chief operating officer of TrimTabs. "People are scared they don't want risky investments, there is risk aversion -- everybody is averting risk in all of its forms, credit or equity."
Such apprehension appeared to be playing out today on Wall Street where the markets stalled as investors kept an eye on Washington to see if Congress would be able to pass the $700 billion financial rescue plan.
Investors are hopeful that the plan, which the House defeated Monday, will pass the Senate tonight. But many remain wary about whether it has enough support to pass the House on a second try, analysts said.
The Dow Jones industrial average, which fell as much as 200 points early in the day, closed down nearly 20 points while the technology heavy Nasdaq lost more than 22 points and the broader Standard & Poor's 500 stock index fell nearly 4 points.
U.S. stocks, which recorded historic sell-off Monday after the House action, soared yesterday as investors regained confidence that some form of the bailout package would gain approval. Some analysts said today's lackluster trading might be a result of investors taking their profits from yesterday.
"US equity markets clawed back in the afternoon and recouped most of the early losses, but remain vulnerable to the bailout news stream," a Brown Brothers Harriman research note concluded today.
"People were taken by surprise the last time when the House didn't pass" the financial rescue plan, said Bill Stone, chief investment strategist for PNC Wealth Management. "You can say, once bitten, twice shy."
The legislation is considered central to keeping credit markets flowing as banks remain reluctant to loan money to each other. It would allow the government to buy the toxic mortgage assets weighing down financial firms balance sheets. But opponents have balked at the price and called it a bailout of the Wall Street firms that caused the current turmoil.
The Senate version is expected to include a provision allowing the Federal Deposit Insurance Corporation to raise the government's guarantee of bank deposits beyond the current limit of $100,000 on each standard account. Advocates of that effort, including both presidential candidates, say it will provide bank depositors with a better sense of security.
Wall Street may be buoyed today by a move by securities regulators and accounting rule-makers to allow banks greater power to decide the value of their investments, even if market data suggest that prices should be lower. That could allow some banks to report smaller losses.
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