The Dow Jones industrial average plunged more than 500 points, erasing its gains for the entire year. Stock indexes have sunk in nine of the past 10 trading days. Here are some questions and answers about what's happened and what it means:
Q: What triggered so much anxiety across the financial markets
Thursday?
A: In Europe, worries mounted that Italy and Spain won't be able
to pay their bills, the latest shudder in a debt crisis that has
gripped the region. The European Central Bank restarted a
bond-buying program to calm credit markets. But it had the opposite
effect on stocks and other investments, highlighting concerns about
a worsening global economy. Investors were also jittery about July
jobs data the U.S. government will release Friday.
Q: Could falling stock prices weaken the economy?
A: Yes, by making people less likely to spend - and companies
less likely to hire. Lower stock prices tend to slow spending as
people see their wealth shrink. And consumer spending drives about
70 percent of the economy. When spending slows, job growth
typically does, too.
Q: Other than the massive selloff, have there been any unusual
signs of distress?
A: Bank of New York Mellon said it will charge a fee to pension
funds and other large customers that want to hold cash deposits
over $50 million. Similarly, the yield on the one-month Treasury
bill fell to almost nothing - 0.008 percent. Normally, banks and
the U.S. government pay people interest for their money. But many
large investors have grown so anxious that, above all, they want to
invest their money in ultra-safe ways.
Q: How bad is this selloff compared with the one after the 2008
crisis?
A: The Standard and Poor's 500 stock index fell 57 percent from
its October 2007 peak to March 2009. So far, the S&P has fallen 12
percent from its highs last spring. Analysts say corporations are
healthier and better able to endure an economic slump than they
were three years ago. Earnings for the second quarter are still on
pace to post a record high.
Q: What's an average investor to do?
A: Stick with your long-term plan. Responding emotionally to
short-term movements in the market is usually a bad idea and
results mostly in locking in losses. But be practical about
protecting yourself from the worst-case scenario if you face big
cash needs in the next few years for college, retirement or other
pressing demands. Stock allocations should be tailored for your
goals and risk tolerance.
