Traders work on the floor of the New York Stock Exchange. The Dow Jones industrial… (Brendan McDermid, Reuters )
The reality of a debt-heavy global economy stuck in low gear hit home in the last three months, driving U.S. stocks to their worst quarterly loss since the 2008 financial crisis.
It would be a great quarter to just forget — if it didn't portend worse to come in the final months of the year.
That's what investors are left to ponder as they count their losses: Does it make more sense to keep running for safety, as many did last quarter, or take advantage of what may turn out to be bargains in beaten-down stocks worldwide?
On Friday, share prices ended mostly lower around the globe, heaping more misery on equity investors battered by growing doubts about the economic outlook. The Dow Jones industrial average slumped 240.60 points, or 2.2%, to close the quarter at 10,913.38.
The 30-stock Dow lost 12.1% in the quarter. And that was pretty much the good news: The biggest stocks held up much better than the rest of the market.
The broader Standard & Poor's 500 index, a benchmark for many 401(k) retirement accounts, fell 2.5% Friday and 14.3% for the quarter. It was the biggest decline since the index crashed 22.6% in the fourth quarter of 2008.
Market losses generally were worse overseas, particularly in Europe as the continent's government-debt crisis raged on. The average European blue-chip stock tumbled 17.4% for the three months.
And in another blow to investor confidence, the asset many people had viewed as a haven — gold — was pummeled in the final few weeks of the quarter amid a steep decline in commodities. The yellow metal slid from nearly $1,900 an ounce in late August to end Friday at $1,620.
The two hiding places that actually lived up to that billing last quarter: cash and high-quality bonds, particularly U.S. government debt.
Yet with Treasury bond yields near generational lows, they aren't offering income-seeking investors much incentive to buy at this point.
Wall Street's remaining cadre of stock bulls argues that equities are cheap. And they may be right, if the bottom isn't about to fall out of the economy.
But trying to persuade average investors of that may be a losing battle. After all, there's no apparent resolution of the factors that made the third quarter so painful: the struggling U.S. economy, a downgrade of America's credit rating, Europe's unending debt crisis and new doubts about emerging economies' growth prospects.
Billionaire Warren Buffett, the perennial optimist, tried to send a hopeful message Monday when he announced that his Berkshire Hathaway Inc. holding company would begin buying back some of its own shares in the market — a move Buffett had resisted for decades. The company's underlying businesses "are worth considerably more" than the stock price, Berkshire said.
In TV interviews Friday, Buffett maintained his view that the U.S. economy was still expanding, though slowly.
The expectation that the U.S. can avoid another official recession is what has kept many institutional investors from rushing for the New York Stock Exchange exits, despite the third-quarter gloom. A late-August survey of big money managers nationwide by Russell Investments found that 79% didn't believe the U.S. economy was entering recession.
The public's opinion, however, is just the opposite: In a Harris Poll in September, 69% of Americans said the U.S. never climbed out of the last recession.
The evidence has been mixed for the last few months, but generally has pointed to weak growth. On Friday, however, the stock market was spooked by the government's report that U.S. personal income fell 0.1% in August, the first decline in almost two years.
Americans still spent in August — personal spending rose 0.2% for the month — but the drop in income raises doubts about future consumption.
That's setting up for another potentially wild market ride in October. Apart from whatever else goes wrong in Europe, more evidence of U.S. economic weakness could trigger a new selling wave in stocks. Better economic data, on the other hand, could bring a torrent of cash in from the sidelines, following the likes of Buffett.
"Once you break either way, I think it's going to be pretty dramatic," said Bill Strazzullo, market strategist at Bell Curve Trading in Freehold, N.J.
Just what everyone was looking forward to: more insane volatility.
Strazzullo admits he's puzzled that U.S. stocks have held up as well as they have. After diving in early August, the S&P 500 index has bounced between 1,120 and 1,220, a trading range of about 9%. And for what it's worth, this still isn't technically a new bear market in blue chips: The S&P is down 17% from its two-year high reached in April, short of the 20% threshold that marks a bear.
But Strazzullo thinks it's more likely the market's next move will be to plummet than to rebound. The S&P, he said, could fall another 15% or so before bottoming.