Sparked by a trading error, volatility returns

The stampede to the exits on Thursday illustrated to financial advisers and market strategists just how skittish investors have become, and especially how frightened they are about the instability of the European economy.

The stampede to the exits on Thursday illustrated to financial advisers and market strategists just how skittish investors have become, and especially how frightened they are about the instability of the European economy.

The Dow Jones Industrial Average, which finished the day down 348 points, was briefly down nearly 1,000 points in late-afternoon trading, marking the largest drop in market history. For the week, the Dow was off 5.9%, its worst weekly showing since March 2009. Yet, already, this morning, the Dow surged more than 400 points on the nearly $1 trillion European bailout package.

Talk about volatility.

Although a technical error was suspected of triggering Thursday’s plunge, the reaction by investors can’t be attributed to a glitch.

“We know that there’s real, palpable fear out there, and at some point [Thursday], it started to take on a life of its own,” said Max Bublitz, chief market strategist at SCM Advisors LLC, which has $3.5 billion under management.

The market drop was interpreted by some market watchers as a reaction to the sovereign-debt issues facing Greece and several other European economies.

“Slowly but surely, people are clueing in to the fact that a bailout of Greece is a bailout of the European banking system,” Mr. Bublitz said. “And anybody who has been in risk assets for the past 10 years has already gotten severely burned.”

After watching the stock market gain 65% from its March 2009 low, a lot of investors were looking for an excuse to take some profits, said Kevin Mahn, chief investment officer at Hennion & Walsh Asset Management Inc., which has $250 million under management and supervision.

“I think it was a long-awaited pullback that was exacerbated by the sovereign-debt issues in Greece,” he said. “There was no news that could have triggered this, and I don’t think the market should have traded off as much as it did, but it also shouldn’t have bounced back as much as it did since the March low.”

Greece is the smallest of the five European counties that are collectively known as PIIGS (Portugal, Italy, Ireland, Greece and Spain), all of which are struggling to manage government debt.

“Greece’s public-sector debt is a snapshot of the next phase of the economic crisis, which began in the U.S. with too much private-sector debt,” Mr. Bublitz said. “It’s all now being manifested in a panicked flight to quality.”

In the context of the global economy, Greece is still small potatoes, but such details rarely matter in the midst of a market panic, according to Sam Stovall, chief market strategist for equity research services at Standard & Poor’s Financial Services LLC.

“Europe is only a quarter of worldwide [gross domestic product], and Greece is 1.9% of the European Union, which means Greece is about the size of Riverside County, Calif.,” he said. “But what the market sell-off indicated was a lack of confidence in the [European Union].”

Meanwhile, as the dust from the stampede started to settle, some advisers were ready to pounce on the newly created opportunities.

The stock market is “very oversold, not an area where one should be selling,” said Bob Kargenian, founder of TABR Capital Management LLC, which manages $160 million.

He added that his clients were surprisingly unconcerned about the historic market volatility last week.

“It’s funny — we did not get one phone call or e-mail,” Mr. Kargenian said.

Thomas Graham Kahn, who helps manage $600 million at value-investing firm Kahn Brothers & Co. Inc., described the abrupt market turmoil as a “great opportunity.”

“The screen’s all red; this is a buying opportunity,” he said. “People are always worried about what’s on the front page of the newspaper, but half the people who are worried don’t even know where Greece is.”

Whether Thursday’s market activity is ultimately defined as an overblown reaction or a technical blip, it will produce a more concentrated focus on the health of the U.S. economy in the context of some of the more troubled global markets, Mr. Mahn said.

“I don’t think we’re headed for a double-dip recession, but people will start picking apart the U.S. economy now,” he said. “People are going to start taking a harder look at the health of the economy and things like high unemployment levels.”

If nothing else, the stock market’s jarring ride Thursday served as a reminder of the closely linked nature of the global economy, said Uri Landesman, president of Platinum Partners LP, a $500 million hedge fund shop.

“Right now, most of the economic data coming out of the U.S. looks very good, but we’re still part of the rest of the world,” he said. “We’re going to be dealing with these opposing forces of the good news coming out of the U.S., balanced by negative news from overseas.”

Senior editor Dan Jamieson and reporter Hilary Johnson contributed to this story.
E-mail Jeff Benjamin at [email protected].