Should Global Stock Markets Shut Down to Cool Off?

Stocks could close lower today for the eight consecutive session, as a wide-ranging loss of confidence has taken hold of markets. Is it time stock markets to close for a few days and take a breather?

There are circuit breakers in place to shut down stock markets when a bout of selling looks like a panic, but they are all intraday measures and, despite large point declines, markets haven’t really come close to those levels. The circuit breakers also don’t close the markets more than a day. For the New York Stock Exchange to close for the day, the Dow Jones Industrial Average would have to fall 3350, or 30% of the average closing value of the DJIA for September.

The Dow industrials have dropped 21% through Thursday, as the market selloff hasn’t shown itself as an obvious intraday panic, but a slow steady decline in confidence. More troubling is that nothing has seemed to cheer markets. Markets have declined following major moves in the last few days, including Congress’s passage the Treasury Department’s troubled asset relief program, the Federal Reserve’s announcement that it will purchase commercial paper and even a coordinated global rate cut.

Part of the problem has been that programs like the TARP and the Fed’s acquisition of commercial paper will take time. Markets might see some relief once those programs start moving. If markets were to close until then, confidence might return to markets when they were reopened.

“The only rational cause for shutting markets is if the [group of seven leading countries] believes it can come to a coordinated set of policies that would address the situation in conjunction with the TARP getting up and running,” said Joseph Brusuelas of Merk Investments.

However, he warns that any action must be globally coordinated by the G-7. If U.S. markets were to close by themselves, market losses would just move offshore. Brusuelas suspects that if G-7 markets close, the secondary markets would follow suit. G-7 finance ministers meet today in Washington, and Bloomberg reports Italian Prime Minister Silvio Berlusconi said political leaders are discussing the idea of closing the markets while they “rewrite the rules of international finance.” However, Berlusconi later played down his comments.

Any closure has to come because governments believe they have a solution. A shut down without a coordinated policy response during that time would just put off the pain until markets were to reopen.

Closing stock markets isn’t without precedent. The NYSE was closed from March 4-14, 1933 for FDR’s “bank holiday” during the Great Depression, and it shut it doors again from Sept. 11-17, 2001 following the terrorist attacks in the U.S.

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