Black Monday, Take Two

It was the worst day in the U.S. stock market since Black Monday in October 1987. In fact, in terms of the absolute dollar market value wiped out--more than $1 trillion--Sept. 29, 2008, is the worst day on record.

And while academics still argue about what caused the market meltdown back in 1987, we had no shortage of reasons for this week's version. The day started off badly, and only got worse. First came news over the weekend of continued financial turmoil in Europe, with governments and central bankers stepping in to rescue several troubled institutions. Then came the announcement of the shotgun marriage of a crippled Wachovia with Citigroup, which was hastily arranged before the market's open. Then later on Monday morning came downgrades of Apple by sell-side analysts, which triggered a sharp decline in the technology sector.

Finally, the biggie. The House of Representatives failed to pass the $700 billion plan for the government to buy up troubled mortgage assets. As Morningstar's Pat Dorsey and Eric Jacobson argued on over the weekend, the Treasury plan may not have been perfect, but it was a reasonable response to the crisis the U.S. banking system has gotten itself into.

The Morningstar U.S. Market Index ended the day down 8.5%, mirroring the sharp declines in the Dow Industrials and S&P 500 Index. Stocks were down. Bonds were down. Commodities--except for gold--were down. Other markets around the world faced sharp dwonturns. Among the biggest equity losers were bank stocks, including Sovereign Bancorp, Regions Financial and Fifth Third Bancorp.

The chart below shows how stocks fared across the Morningstar sectors. As you can see, there was no respite from the selling, although utilities, health care, and consumer goods held up relatively well.

We see a similar story looking at returns for each Morningstar style box. Yes, small caps held up relatively well, but they were still down significantly.

We expect to see more dramatic volatility in the days ahead--either up or down--as the market digests new information. We also think it will take a long time for this credit crisis to play itself out. Given the complexity of our financial system, it's literally beyond anyone's ability to forecast where we end up six months or a year from now. We would reiterate one thing, however. Selling into a panicked market has never been a recipe for long-term investment success. Taking the long view of equity markets, declines like these periodically happen and are something that investors occasionally have to live through.