Average investors are frustrated that the U.S. government is no longer among the world's most creditworthy, and fear Monday's stock plunge may not be the end.
And that's quite a statement. Monday was a day to bail on stocks as investors, unnerved by Friday's downgrade of the nation's debt rating, sought safety in cash and less volatile alternatives. The sell-off pushed the Dow Jones industrial average below 11,000 for the first time since November. The index closed the day down 634.76 points to 10,809.85. That's a decline of 14.7 percent since mid-July.
The question is whether investors will keep their long-term goals in mind and be patient enough to stick with a plan. Any market rebound seems a ways off given the spate of bad news about the economy, and debt problems here and in Europe.
"I don't think investors are worried about the downgrade. It's more a case of investors being afraid of each other," says Charles Lewis Sizemore, chief investment officer with Dallas-based Sizemore Capital Management. Many investors, who think someone else is going to sell out of panic, will go ahead and join the fray.
"When your credit gets downgraded like that, it's sort of emasculating to the national psyche. It affects people's moods," Sizemore says. This may ultimately prove to be more of a downgrade of what little confidence many consumers had.
Shaken confidence spurred retirement savers to call for help and move money around in their 401(k) accounts on Monday. Investors with mobile trading applications also did some quick money shuffling.
Vanguard, the nation's largest mutual fund company, said phone calls from its investors were nearly 40 percent higher than normal Monday.
Transaction volume in 401(k) and other Vanguard client accounts was also heavy, spokeswoman Linda Wolohan said. She characterized the moves as "a mixed bag, with some investors taking money off the table, and others seeing the market decline as a buying opportunity."
What's more, brokerage firm E-Trade Financial reported a record number of trades were placed Monday by investors using mobile devices.
Some investors are hoping that the downgrade and its consequences will spur Congress to take the painful steps needed to ultimately strengthen the economy
"I'm sort of glad it happened," says Matt Moscardi, a 32-year-old researcher with a Boston financial services company. "My investments might get killed in the short-term, but there's some serious dysfunction in our fiscal policy."
Richard Port, a 40-year-old nonprofit manager from New York, said he saw the S&P downgrade as a proxy for the American people voicing no confidence in U.S. political leadership.
"The S&P almost speaks for the American people. They're saying, `You waited till the last minute for a debt deal, you don't have my interests in mind, this is what you deserve,'" Port says.
The Dow responded to news of S&P's move by tumbling more than 250 points after Monday's opening bell. The decline worsened as the day progressed. As investors sought safety, the price of gold topped $1,700 an ounce for the first time.
President Obama urged calm, saying in a televised address that financial markets around the world continue to believe the U.S. is creditworthy.
Corporate profits remain strong, which is a key reason why the Dow remains about 65 percent above its March 2009 low. Yet its decline in recent weeks appears to reflect what many average Americans have felt since the recession officially ended two years ago. They continue to face persistently high unemployment, flat wages, a stalled housing recovery, and fear that Washington has only begun to squarely address its debt problems.
It's this tough environment that gives some investors confidence they've adequately protected their investments for another rough stretch. After the 2008 financial crisis, Carol Clemens, a 64-year-old retiree from Edmond, Okla., loaded her portfolio with dividend-paying U.S. and foreign stocks. With corporate earnings remaining healthy, she doesn't have any immediate plans to sell.
"I expect there are still lemmings left who must run for the cliff, but I will not be among them," Clemens says.
Her reaction to S&P's debt downgrade: "I'm just glad that one of the ratings agencies finally had the gumption to take a stand, and tell Congress and the president: `You've gone too far, guys. It's time to get real.'"
Plenty of investors had moved quickly to reduce their risk as Congress approached the Aug. 2 deadline for reaching a debt ceiling deal, avoiding a potential default. Pat Rosenheim, a 57-year-old former phone company technician from Danvers, Mass., sold nearly all his stock and mutual fund holdings on July 29th, as a deal remained in doubt.
Now, his portfolio is about 90 percent in cash, and he's not looking to jump back in.
"I'm thinking `Gee, isn't it great to be almost all in cash right now,'" Rosenheim says. "In the end, it all boils down to really only one thing: Can you sleep at night?"
David Savage, 51, of Naugatuck, Conn., a manager of a demolition equipment company, is taking a ride-it-out approach that most financial planners recommend, provided an investor has a sensible long-term plan. Savage doesn't plan any changes to a 401(k) portfolio invested primarily in stock index funds.
"One should never underestimate the investor's ability to panic," Savage says.
He expects a market recovery, and doesn't believe the economy will slip back into recession.
"Companies that have been on the comeback will continue to operate the same today as they did last week," he says.
Still, some investors are active, regarding Monday's market's decline as a buying opportunity.
"I'll be watching for the panic to turn, because a crisis is a terrible thing to waste," says Dick Bristol, a retired Air Force major and dividend-stock investor from Biloxi, Miss.
While Bristol fears the market decline will be prolonged, the 73-year-old believes S&P "has done us a favor" by potentially pushing the U.S. toward greater fiscal responsibility.
Johanna Schulman, a certified financial planner with Ameriprise Financial Services in Cambridge, Mass., says the individual investors she advises didn't flood her with phone calls and emails over the weekend. Those who contacted her recognized they are faced with very limited choices, Schulman says.
"They can stay the course, as they know they are supposed to," she says, "Or they can sell stocks and rush into something safe _ a course they know they are not supposed to take, and one that risks missing out on whatever recovery may lie ahead."
Schulman told clients to expect volatility, while keeping long-range plans in mind.
Cass Chappell, a planner with Chappell, Mayfield & Associates in Atlanta, recently heard from several clients "who just wanted to be calmed down."
Most also were clients in 2008, and have embraced Chappell's belief that successful investing means avoiding the temptation to overhaul a portfolio in response to day-to-day news.
They especially should avoid jumping online, going into their accounts and getting out with the push of a button.
"For many people who make these decisions on their own, it's all or nothing," says Adam Bold, founder of The Mutual Fund Store, a manager of $6.5 billion based in Overland Park, Kan.
"It's best not to make dramatic changes on days when we have high volatility," he says. "Investors would be very well-suited, regardless of what's going on, to wait a day or two."
Beth Fouhy in New York City contributed to this report.