Wall Street Rout Threatens 2nd-Half Investments

So much for three years of portfolio recovery.

Wall Street suffered its biggest point drop since December 2008 on Monday, Aug. 8, with small-cap companies particularly hard hit.

The decline was hardly unexpected on the heels of S&P's unprecedented downgrade in the U.S. credit rating, but many people reading this are now poorer -- on paper -- than they were over the weekend. 

If there was any bright spot in the hammering, it's only that U.S. treasury bonds had a relatively good day. That provided a glimmer of hope that investors around the world still have confidence that the United States can get its financial house in order.

Here are the glass-half-empty stats. The Dow Jones Industrial Average sank 634.76 points, which was a 5.6 percent decline, ending at 10809.85. The loss extends those recorded last week, when Congress finally came to a much-criticized agreement about raising the debt ceiling and arranging for a massive series of budget cuts.

Demonstrating the devastating impact that the financial crisis continues to have on smaller businesses, the Russell 2000 index, which follows small-capitalization stocks, dropped 8.9 percent to 650.96. The reason is simple: investors often perceive stocks like these as a bigger risk during a market correction. What it means for small businesses is this: less capacity to borrow.

On the glass-half-full side, there were two bright spots. Gold ended at above $1,700 an ounce for the first time. What's more, traders couldn't seem to buy enough U.S. Treasury bonds. Apparently, they felt bonds were the least risky investment available to them. Yields on 10-year notes, for example, rose to 2.318 percent.

James Paulsen, chief investment strategist at Minneapolis-based Wells Capital Management, told the Wall Street Journal: "AA+ is the de facto AAA. There is a lot of fear in the markets right now, and Treasurys are still the place to go."

The next short-term test for the market will be a meeting scheduled by the Federal Reserve on Aug. 9. The outcome will be watched closely, as the central bank seeks way to stimulate growth without simultaneously stimulating inflation. Observers believe that Fed will come to the conclusion that interest rates need to be held in check. One program that is unlikely, given what some characterized as "ferocious buying" of Treasury bonds on Aug. 8, is another attempt at "quantitative easing" such as the so-called QE2 program that ended in June.

Brian Bethune, a visiting economics professor at Amherst College, told the Bloomberg news service: "Inflation complicates [Fed Chairman Ben] Bernanke's decision-making about launching QE3. That's what likely to hold the Fed back for now. That could change later if the economy weakens. It's a very tricky situation for the Fed."

A fiscal quandary, indeed, and one likely to keep the market unsettled for many days to come. Likewise, the small-business management outlook for the second half will continue to be unsettled.

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Heather Clancy is an award-winning business journalist with a passion for small businesses, green technology and corporate sustainability issues. Her articles have appeared in Entrepreneur, Fortune Small Business, The International Herald Tribune and The New York Times. Follow her on Twitter.