Thursday (September 18) contributed to one of the most incredible, dramatic weeks of equities’ investment that Wall Street has ever seen. Thursday was the third day in the trading week that saw a 400+ point move in the Dow. The good news for investors was that the 410 point gain helped erase a sizable portion of the nearly 1,000 points the Dow gave away on Monday (504 point) loss and Wednesday.

The reason for the dramatic and emotionally-driven trade has been a climactic string of developments in the credit markets that have filled the headlines. Beginning with the news of a government bailout Sunday and Monday, there have been several days of back and forth news. Several large companies have expressed concern or sought buyout. The government put up an $85 billion bailout of AIG using emergency response funds. This made the total emergency response funds used to bail out creditors a remarkable $140 billion to date. This is the most used since September 11.

The mostly negative news of buyouts and bailouts has concerned investors and virtually any American with a significant savings or investment account. However, Thursday’s 400 point Dow gain was driven mostly by news that the Bush administration had requested the ability from lawmakers to buy assets from struggling creditors. The administration again showed its aggressive approach to combating the country’s economic woes. Similar to the aggressive rate cuts and sub-prime bailout last year, the administration is following through on its resolve to do what is necessary to protect the long-term US economic viability.

Treasury Secretary Henry Paulson and Fed Chief Ben Bernanke briefed Congress on the details of their plan that would enable the government to buy assets from key banks to help sustain them. Of particular interest, Paulson’s comments indicated a belief that much of the country’s problems and economic instability is centered on the ongoing real estate market struggles. Though creditor’s have been blamed for being to carefree in going after business in a loosely-regulated environment the last few years, Paulson said the current creditor challenges stem more from an inability of the real estate sector to pick up steam.

Despite still low interest rates, real estate and new construction buying continues to slide. Just this week, data showed a 6.2 per cent decrease in August for new home construction. This is a strong indication that real estate investors and home builders are still reluctant to put money into new developments in an overly saturated real estate market. Many large metropolitan housing markets are still overwhelmed with excessive inventories of homes that have restricted the market since foreclosure records began to fall mid-to-late last year. A huge excess of houses has forced home prices to fall in historic fashion as well, and the fear has prevented much significant interest in new buying and new development.

There is no question that emotions are running high among American consumers and investors. The radical moves in stocks this week shows just how much tension is abound for the economy and the financial sector. Fear dominated headlines in the early parts of the week and hope was somewhat restored Thursday. Friday could certainly provide as much of a move in one direction or the other. Buyers may look to get in at closeout stock prices and sellers may be looking to dump stocks in fear of potential weekend events.

Market Recap

The Dow was smashed again Wednesday, to the tune of 449 points. This makes the combined trade for Monday and Wednesday a nearly 1,000 point loss for the blue chips. Credit and housing were once again concerns. Housing construction dropped 6.2 per cent during August. The NASDAQ and S&P were actually bigger losers percentage-wise. The NASDAQ dropped 109 with the S&P down 57 points. The big trading day trend continued Thursday, but this time in a positive way. The Dow rebounded by 410 points, thanks to a Bush administration plan to request the ability to buy assets from struggling banks. Finance stocks led the gains as investors viewed the potential fix as a saving grace.

Neil Kokemuller
Thursday, September 18, 2008
10:35 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

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