Global Stock Markets Drop as Central Banks Scramble to Stop Panic

This morning, stock markets around the world dropped to record-breaking new lows, despite the passage of the U.S. Bank Bailout Bill on Friday. As of 1pm EST:

• The Dow was down over 500 points to 9,798, the lowest level in four years.
• European stocks, as measured by the Stoxx 600, fell 7.6%, the U.K.'s FTSE 100 dropped 7.9% and France's CAC 40 slid 9%. These were the largest declines since 1987, and erased $2.5 trillion from global equities. It has fallen 34% this year, and trades at 10.1 times earnings, the lowest since the last recession in 2002.
• The euro slid the most against the yen since its debut.
• Oil fell 5.3%, to below $90 a barrel.
• Three-month LIBOR climbed to 4.29%, the biggest premium over the Fed Funds rate since 1990. (Source: Bloomberg, European Stocks Tumble; Overnight Commercial Paper Rates Rise as Bank Bailouts Spread, October 6, 2008)

Although the bailout was approved, it will still take a week or two before relief can be implemented. Therefore, global credit markets are still frozen as banks stay reluctant to lend to each other or other businesses. At the end of last week, the amount of commercial loans available dropped 5.6%, to a three-year low of $1.6 trillion.

In response, global central banks and governments are doing what they can to restore normal functioning:

• The Federal Reserve will increase its Term Auction Facility to $150 billion, twice in October and twice in November.
• $900 billion,
• It will pay interest on bank reserve requirement funds at a 75 basis point discount to the current rate.
• It signaled that it would be willing, if necessary, to cut the Fed Funds rate by half a point in its October 29 FOMC meeting.
• Treasury will re-introduce three year notes, and introduce more longer term notes, to provide more funding for the Federal Reserve.
• A summit was held with France, Germany, Great Britain, Luxembourg and the ECB on Saturday to pledge support for Europe's financial system.
• Germany guaranteed all bank deposits, and bailed out Hypo Real Estate Holding for €68 billion.
• Belgium and Luxembourg sold the nationalized portion of Fortis NV to BNP Paribas SA for €15 billion.
• Italy's UniCredit launched a €3 billion emergency capital increase. (Source: WSJ, Europe Races to Shore Up Banks as Crisis Spreads, October 6, 2008)

What It Means to You

This is a classic bear market panic, as fear feeds on fear to drive stock prices lower. The Dow has dropped more than 30% in the past year, but even this is not as bad as the decline in 1987, when the Dow dropped that much in a month. Two years later, it had regained all the ground it had lost.

The current global financial crisis IS unprecedented, but so is the resources available to solve it. Things may get worse before they get better as global central banks sort out a solution. We are in a bear market, and most likely a recession, but we've been in one for the past year, and most only last 12-24 months.

The best course of action is to continue to focus on your personal finances, and look for ways to improve your job kills, marketability, and financial knowledge. Within every demise are the seeds of growth for the next opportunity, but only for those who are prepared.