As the Dow Jones industrial average plummeted past 7000 yesterday, the drop could lead to another round of mutual fund redemption and hedge fund sales.
That's according to Scott Powell, managing director of common stock and managed account investments at MEMBERS Capital Advisors in yesterday's MarketLine alert.
"While we have discussed the likelihood of equity markets being substantially higher by the end of 2009, we have tempered that with the reality that investors might drive markets to new lows during this economic troughing period that we are in the middle of. Unfortunately this is playing out and weighing heavily on investor sentiment and perseverance," Powell wrote.
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A $61.7 billion quarterly loss from American International Group Inc. coupled with more government aid to bolster the struggling insurance company and a 70% drop in net profits from HSBC, Europe's largest bank, has caused new waves of anxiety among investors worldwide, Powell said. One silver lining was seen in gains in the manufacturing sector with increased production and supplier deliveries, he noted.
"We believe it remains critically important for clients to have appropriate exposure to cash and stable value/guaranteed oriented savings to complement their longer term diversified investment programs," Powell said. "We also believe that a significant bear market rally in equities could well transpire over the course of 2009 that would provide some relief to investor's psyche and allow continued opportunities for portfolio adjustments and rebalances at more comfortable levels."
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