As stock prices tumble to fresh lows, investment strategy is coming down to this: How much pain can you stand?
Some investors reached that threshold Monday, when the Dow Jones industrial average fell almost 300 points in a global sell-off and closed below 7,000 for the first time since May 1997.
The Dow has now fallen 52% during the bear market that began almost 17 months ago. The blue-chip gauge has plunged 23% just since the first of the year.
Such staggering declines are making some people think twice about holding on to their stock portfolios.
"Clients are calling and asking me to sell their stocks and put it in cash and bonds," said Mike Mullaney, a portfolio manager with Fiduciary Trust Co. in Boston. "They just can't take it anymore. People just don't want a dime's worth of exposure" to stocks right now.
Other money managers and financial advisors are reporting similar calls from clients who had been hanging tough despite months of losses. With concerns growing about the depths of the financial crisis and economic downturn and the Obama administration's ability to deal with them, more investors are throwing in the towel.
During bear markets, investors go through stages of denial, anger, depression and acceptance, said E. Martin von Kanel, a certified financial planner with Patriot Wealth Management in Torrance.
"I think clients maybe have accepted the fact that we're in an economic crisis equal to, if not greater than, the Great Depression," Von Kanel said. "I'm an eternal optimist, but now it's been tempered."
The Dow's move last month below what had been the bear market's previous nadir -- reached in late November -- has persuaded more investors to flee stock mutual funds. A net $32 billion was pulled from stock funds in February, TrimTabs Investment Research estimates. That would be 0.9% of the $4.33 trillion invested in U.S.-based stock funds at the end of February and the biggest outflow of money since October, when stock funds were hit with $72.3 billion in net redemptions.
The market's latest round of punishing declines was triggered by renewed signs of trouble at faltering insurer American International Group Inc. and a series of uninspiring reports on the state of the U.S. economy. A downbeat appraisal by investment guru Warren Buffett didn't help matters.
The Dow industrials plunged 299.64 points, or 4.2%, on Monday to 6,763.29. The broader Standard & Poor's 500 index fell 34.27 points, or 4.7%, to 700.82 -- dipping briefly below 700 -- while the tech-heavy Nasdaq shed 54.99 points, or 4%, to close at 1,322.85.
The selling began overseas, with key indexes dropping 5.3% in Britain, 4.5% in France and 3.8% in Japan. Stocks fell 4.6% in Mexico and 5.1% in Brazil.
On Wall Street, losers swamped winners by more than 14 to 1 on the New York Stock Exchange, almost matching the lopsided sell-offs investors endured in late November. All 30 stocks in the Dow were down for the day, and 492 of the S&P 500 stocks closed in the red.
The S&P 500 index is down 55% from its October 2007 high and off 22% year to date.
Stocks moved lower from the opening bell after the federal government said it would provide an additional $30 billion to AIG, which has already received $150 billion in government aid.
The renewed effort to prop up the insurer, coupled with continuing problems at banking giants, are leading many investors to question whether the government's efforts to bail out the financial system are working, analysts said.
Meanwhile, HSBC, Europe's largest bank, issued a disappointing profit report and said it needed to raise capital. U.S.-traded shares of HSBC tumbled 19%.
Investors were also digesting Buffett's annual letter to shareholders of his insurance and investment company Berkshire Hathaway Inc., which Buffett said had its worst year ever in 2008. In his letter, which is closely watched by many investors, Buffett said he expected the economy to be "in shambles" throughout 2009 and "probably well beyond." Berkshire's stock fell 5.2%.
Early in the day, there was some mildly positive economic news in a report suggesting that the U.S. manufacturing sector contracted in February at a slower pace than the month before as factories cut production to match collapsing sales.
The Institute for Supply Management's factory index rose to 35.8 last month from 35.6 in January. Readings below 50 signal contraction. Another report showed consumer spending rose more than expected in January after six straight declines as Americans took advantage of post-holiday discounts.
Yields on longer-term Treasury securities were down sharply as investors sought shelter from falling stock prices. The demand for U.S. government bonds helped the dollar rally. Oil futures fell along with stocks, dropping $4.61, or 10%, to $40.15 a barrel in New York trading.
One factor that may be pushing investors over the edge is the stunning speed at which stock prices have fallen, said Kurt Brouwer at Brouwer & Janachowski, a Tiburon, Calif., investment advisory firm.
The Dow industrials fell 38% during the 2000-02 bear market. The average has lost 41% just since Labor Day.
"This has happened in a very short time period," Brouwer said.