World share markets fell seven percent (MSCI World, US$) overnight on Monday after the House of Representatives rejected the US government’s financial rescue plan. The S&P 500 recorded its biggest percentage decline since 11 September 2001 of 8.8 percent. The Dow Jones Industrial Average lost 778 points or seven percent.

The Dow suffered its biggest ever point loss, but not the largest percentage loss. At the end of this article you'll find the top-10 one-day declines on the Dow both in terms of points and percentages. The biggest percentage drop took place in 1914 on concerns that World War One would result in panic selling. The decision was made to close the New York Stock Exchange in July 1914. When the exchange opened for trading four months later, it was 24.39 percent lower. During the time of the Great Depression, the Dow Jones also suffered significant one-day percentage losses.

History shows that steep one-day losses are often quickly reversed. This can be clearly demonstrated by the market’s behaviour in October 1997. Although the Dow fell by 554 points on 27 October 1997, it recovered immediately and posted a one-day gain of 337.17 points the very next day. This behaviour is very difficult to predict. In reacting to the significant declines on the markets, investors may often miss out on the recoveries.

What was the US rescue plan?

Events over the last few months have prompted financial institutions to become increasingly cautious about lending money due to concerns about bad mortgage debts on borrowing companies’ balance sheets. The US$700-billion rescue plan, known as the Troubled Asset Relief Programme (TARP), involved buying up these distressed mortgage-backed securities and other ‘toxic’ assets off companies’ balance sheets. The aim was to enable banks and other financial institutions to continue their lending business and to restore confidence and stability in the financial system. The rescue plan was devised by the US Federal Reserve Chairman, Ben Bernanke and the US Treasury Secretary, Henry Paulson. They considered the plan necessary given the prolonged credit crisis and the increase in financial institution collapses.

Why was the rescue plan rejected?

In an effort to protect taxpayers, congressional lawmakers imposed certain restrictions on the financial rescue proposal. Their aim was to shield taxpayers from the downside, but also to enable them to participate in the potential benefits such as the proceeds from the future sale of businesses where the government has become a substantial shareholder. Members of the Republican Party were largely against the rescue plan while the Democrats generally supported it. The final vote was not enough to proceed with the rescue plan, which was defeated by 228 votes to 205.

Following the rejection of the US rescue plan, US President George Bush issued a statement in which he promised to consider alternative ways to support struggling financial institutions. The House of Representatives could reconsider the initial rejection. More statements are expected in the next few days. Until the rescue plan is agreed upon, investors should expect markets to remain volatile over the short term and be highly sensitive to any news releases.

The bottom line

Despite the current market volatility and uncertainty, it is important to remember that fundamentals ultimately drive market performance over the long term. Diversified portfolios’ exposures to specific investments directly affected by the financial crisis are relatively small. The long-term fundamentals of quality companies across asset classes and in other sectors have not changed. Patient investors with a well-diversified approach are well placed to capture the recovery when markets stabilise. The combination of sound fundamentals and today’s low prices will result in respectable long-term returns for diversified portfolios. While the environment may remain volatile over the short term, acsis’ long-term outlook has not changed.

The all-time top-10 one-day points losses on the Dow

1. 29/09/2008: 777.68
2. 17/09/2001: 684.81
3. 14/04/2000: 617.78
4. 27/10/1997: 554.26
5. 31/08/1998: 512.61
6. 19/10/1987: 508.00
7. 15/09/2008: 504.48
8. 18/09/2008: 449.36
9. 12/03/2001: 436.37
10. 27/02/2007: 416.02

The all-time top-10 one-day percentage losses on the Dow

1. 12/12/1914: 24.39%
2. 19/10/1987: 22.61%
3. 28/10/1929: 12.82%
4. 29/10/1929: 11.73%
5. 06/11/1929: 9.92%
6. 18/12/1899: 8.27%
7. 12/08/1932: 8.40%
8. 14/03/1907: 8.29%
9. 26/10/1987: 8.04%
10. 21/07/1933: 7.84%

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