Wall Street’s Wild Spirits

Story Highlights:

• This week, three of the US's biggest financial firms either merged, declared bankruptcy, or were nationalized as the feds announced a comprehensive plan to confront the crisis.
• Stocks were extremely volatile and investor uncertainty palpable. But both the US and global markets ended the week roughly even.
• Unless there's good reason to believe global capital markets are well and truly coming to an end, investors should favor analysis over action for now.

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Over the last week, the world has seemingly moved beneath our feet. Three of the US's biggest financial firms either merged, declared bankruptcy, or were nationalized. The week ended with the government announcing a possible sweeping plan to confront the crisis by relieving companies of any remaining bad investments, limiting short selling, and backing up money market mutual funds. We covered much of the news throughout the week:

Lehman and Merrill: Weekend at Lehman's
Government intervention: Concerning AIG
Short selling: A Shot in the Dark

Predictably markets went haywire—losing 4.7% on Monday and again on Wednesday, then reclaiming about as much Thursday and Friday. Those of us in finance were joined by the rest of the nation as we watched events unfold fast and furious. The uncertainty was palpable. But if we know one thing, it's this: Now is not the time to jump ship, if investors haven't already. An old market sage once said the golden rule of investing is "When in doubt, do nothing." And in times like these, staying still is an active decision.

What do we know right now? We know the government's involvement will continue, but we don't know to what end. We know Financials firms are still hurting, but the system is strong enough to take some pretty solid shots (à la the Lehman bankruptcy). We know systemic changes have been significant, but they're not over yet—and until they are, volatility will remain elevated and the longer-term fallout unclear.

We'd urge investors check in with their emotions right now. Maybe some folks feel this week was a disaster. But surprisingly it wasn't. Despite the tumult, markets ended just about where they started, with the S&P 500 edging 0.3% higher and global markets adding 0.4% on the week. What does that tell us? Actually not much. It means investors are understandably confused right now. And that's OK in the face of such meaningful change.

Further, as we've written before, markets could fall more from here, but when they recover they should rise quickly. In the meantime, let's carefully consider the new financial landscape. Unless there's good reason to believe global capital markets are well and truly coming to an end, investors should favor analysis over action for now.

* Sources: Thomson ONE; global market returns measured by the MSCI World; as of 9/19/2008