Black Monday, Take Two

It was the worst day in the U.S. stock market since Black Monday in October 1987. In fact, in terms of the absolute dollar market value wiped out--more than $1 trillion--Sept. 29, 2008, is the worst day on record.

And while academics still argue about what caused the market meltdown back in 1987, we had no shortage of reasons for this week's version. The day started off badly, and only got worse. First came news over the weekend of continued financial turmoil in Europe, with governments and central bankers stepping in to rescue several troubled institutions. Then came the announcement of the shotgun marriage of a crippled  Wachovia  with  Citigroup (C), which was hastily arranged before the market's open. Then later on Monday morning came downgrades of  Apple (AAPL) by sell-side analysts, which triggered a sharp decline in the technology sector.

Finally, the biggie. The House of Representatives failed to pass the $700 billion plan for the government to buy up troubled mortgage assets. As Pat Dorsey and Eric Jacobson argued on Morningstar.com over the weekend, the Treasury plan may not have been perfect, but it was a reasonable response to the crisis our banking system has gotten itself into.

The Morningstar U.S. Market Index ended the day down 8.5%, mirroring the sharp declines in the Dow Industrials and S&P 500 Index. Stocks were down. Bonds were down. Commodities--except for gold--were down. And foreign markets got crushed as well. Among the biggest equity losers were bank stocks, including  Sovereign Bancorp ,  Regions Financial (RF), and  Fifth Third Bancorp (FITB). You can see other stock losers here. And for a good overview of foreign markets, please see this piece from our ETF team.

The chart below shows how stocks fared across the Morningstar sectors. As you can see, there was no respite from the selling, although utilities, health care, and consumer goods held up relatively well.

Morningstar Sector Idx Declines 9/29    (%)
Manufacturing	-7.79
Consumer Goods	-4.21
Industrial Materials	-8.20
Energy	-11.38
Utilities	-5.39
Services	-9.10
Health Care	-5.54
Consumer Services	-6.07
Business Services	-7.17
Financial Services	-15.16
Information	-8.80
Software	-8.30
Hardware	-9.37
Media	-9.42
Telecom	-7.61

We see a similar story looking at returns for each Morningstar style box. Yes, small caps held up relatively well, but they were still down significantly.

We expect to see more dramatic volatility in the days ahead--either up or down--as the market digests new information. We also think it will take a long time for this credit crisis to play itself out. Given the complexity of our financial system, it's literally beyond anyone's ability to forecast where we end up six months or a year from now. We would reiterate one thing, however. Selling into a panicked market has never been a recipe for long-term investment success. Taking the long view of equity markets, declines like these periodically happen and are something that investors occasionally have to live through.