A Crisis Of Financial Faith

Traders work on the floor of the New York Stock Exchange, Wednesday, Oct. 8, 2008. Wall Street extended its huge decline Wednesday as an emergency interest rate cut failed to alleviate investors' fears that the paralysis in the credit markets will set off a global recession. (AP Photo/Richard Drew)
AP Photo/Richard Drew

After the Dow dropped 18 percent last week and the Standard & Poor's 500 experienced the biggest one week drop since 1933 - fear is now the driving motivation and, as CBS News correspondent Priya David reports, investors find themselves in a crisis of financial faith.

"It's panic, it's fear - I think we just don't know what's going to happen," one investor said.

And the media drumbeat doesn't help. Many investors responded when Jim Cramer, host of CNBC's "Mad Money" said this on his television show last week:

"Whatever money you need for the next five years, please take it out of the stock market right now,"

When people hear that, David reports, they call their brokers and many sell.

The markets even track fear itself. The Volatility Index, or VIX, is at a record high.

"VIX has been soaring, will continue as credit crunch continues," says Jordan Goodman, author of "Fast Profits in Hard Times."

The mint has stopped taking orders for gold coins as panicked investors stampede out of the banks and stocks into the safety of tangible assets, David reports.

History tells us that investors go through an emotional cycle. It starts with hope as growth begins, moving to greed, then to skepticism of high prices. Before the cycle is complete, investors then shift to fear as the stock drops, then panic and finally despondency and a bottom, and back to hope again. But as to whether we've reached that bottom, experts disagree.

"We're on our way there, but I don't think we're there yet," Goodman says.

"Now you have these perma-bears come out, the ones who are saying repent now the end is near, and they're talking about seeing another 20, 30, 40 percent decline," says Sam Stovall, chief investment strategist for Standard & Poor's.

But Stovall points out that two thirds of stocks on the New York Stock Exchange are trading at a 52 week low. He calls that a sure sign of an emotional bottom.

"Now, when everyone is telling you how bad they feel, chances are we're at a bottom and its time to buy," Stovall says.

But no one knows exactly where the real bottom will be and it could be weeks before we even know we've hit it.

"People who are trying to buy stocks, even strong stocks right now, are trying to catch a falling knife," Goodman says.

One thing that's for sure is that we're going through a period of uncertainty, David reports, as investors try to decide if it's too late to sell or too early to buy.

The experts that spoke to CBS News agreed that investors should make decisions based on facts, not feelings. So, they say, take a deep breath before you take your next step.