Why markets are plunging, why it's worse in Canada

ROB CARRICK
Globe and Mail Update
October 6, 2008 at 2:10 PM EDT

OTTAWA — What happened in stock markets Monday?
The S&P/TSX composite index plunged more than 1,000 points, or about 9.5 per cent, by mid-morning, then bounced higher so that the loss for the day came in around 650 points just before noon. The big U.S. indexes, the Dow Jones industrial average and S&P 500 stock index, were both down about 4 per cent, while European and Far Eastern markets were down sharply as well. The early morning plunge put the Canadian market in sight of its 11.3-per-cent drop on Oct. 19, 1987, which is known as Black Monday. The Dow fell 22.6 per cent that day.

What's driving the markets lower?
Markets in Canada and around the world are being hit hard by concern that the $700-billion (U.S.) bailout of the U.S. financial sector won't be enough to alleviate a worsening credit crunch, where major banks are drastically curbing their lending and hurting the ability of companies and even some governments to finance their operations. Worries that an economic slowdown in the United States will lead to a global recession are also hurting the stock markets. The Canadian market is being hit harder than most today because the S&P/TSX composite index is heavily influenced by resource stocks, which are being hammered on fears that demand for oil, metals and fertilizers will fall as global economic growth slows. Oil prices were off a few dollars a barrel today, putting them about 40 per cent below where they were at their July peak, though they're still higher than they were a year ago.

Are there any safe places to invest right now?
The old cliché “cash is king” applies. Government Treasury Bills and short-term bonds are safe, and so are guaranteed investment certificates and high-interest savings accounts offered by banks, trust companies and credit unions that are members of a deposit insurance scheme like the federally-backed Canada Deposit Insurance Corp. Money market funds are not loss-proof, but they are an option if you're looking for a place to park some money.

Are any parts of the stock market doing OK right now?
Not really. It's more a matter of finding sectors that are less beaten up than others. Consumer staples – think groceries and drugstores – is one. Telecom companies are another. Financials, believe it or not, have also hung in comparatively well in the recent market downturn after some big losses previously.

What should you do now?
Selling now means locking in potentially gut-wrenching losses that will ease when the market turns around. One common feature of bear markets for stocks: They all end and are replaced by bull markets. If you can stand the potential for more losses in the near term, buying now will set up long-term gains in stocks.

What's happening in the credit markets?
The Bank of Canada continued its efforts to add some grease to the financial system , but there was no sign of any change for the better. In the United States, pressure has been building on the Federal Reserve to push through an emergency interest rate cut to bolster confidence. There has been talk that other countries would similarly cut rates.