October 2008
Financial assets experienced extreme turmoil in October, as the economy slowed and the government interceded in the capital markets. The S&P 500 stock index declined 16.7% for the month, and was significantly worse prior to a late month advance. The bond market, with the exception of US treasury securities, also declined, with the greatest damage inflicted on longer term maturities and lesser quality issues. Liquidity in most all markets dried up considerably and near panic conditions drove the US government to create the ‘rescue’ program designed to free up capital flows. The ‘flight to quality’ that began in September continued, as investors sought safety and liquidity. The deleveraging of many speculative investments, including a number of hedge funds, contributed to the rapid decline as assets were sold at distressed levels. Looking ahead, the combination of a slumping worldwide economy and illiquid capital markets will present a challenging environment. Investors will need patience, as the economy works through recessionary conditions, and the government intervention efforts take time to implement and have an impact.
