After plunge, Massachusetts takes stock

by || 08/09/2011

From Boston boardrooms to factory floors to kitchen tables across the state, a constant drumbeat of negative news is deepening financial anxiety, threatening to curb business development and consumer spending, and undermining an already weak economy.

As the Dow Jones industrial average plunged 634.76 points yesterday, negative sentiment emanated from many sectors of the Massachusetts economy. A leading housing researcher reported a sharp increase in home foreclosures, financial companies scrambled to calm skittish investors, and several business leaders said the stock market losses and US and European debt woes are combining to sap the frail recovery.

“The wheels could fall off,’’ said Andre Mayer, an executive vice president for Associated Industries of Massachusetts, a business advocacy group. “There’s obviously increasing uncertainty, and that’s very disruptive to economic activity.’’

While many business leaders said it is too early to gauge the effect of the recent events, some fretted that even raising the question will cause companies to postpone hiring decisions and other investments until they have a better sense of where the economy is heading.

Biotechnology firms and research organizations worried about a drop in federal funding as congressional leaders promise to slash spending; real estate developers voiced concerns that falling consumer and business confidence will cut demand for new stores, homes, and offices; and people in the financial world are trying explain the US credit downgrade to nervous customers.

“We’re trying to figure out exactly what to say,’’ said Tom Luster, a head of investment grade bond investments for Eaton Vance Corp.

Financial Services and Investment While Boston’s financial firms dealt with another day of heavy trading and steep stock losses, federal regulators moved to halt another selling stampede by reassuring investors they can continue to own US Treasurys after the downgrade by Standard & Poor’s Friday. The Federal Deposit Insurance Corp. has told banks it will still consider US Treasurys and other securities backed by the government just as safe as it had before the downgrade. And on Sunday, the National Association of Insurance Commissioners said the downgrade will have “no impact on insurer investments’’ in US bonds.

Boston-based Silver Bridge Advisors LLC predicted the S&P downgrade would increase volatility, particularly since it comes as investors are already skittish about the economy and various debt crises. But Silver Bridge said its research of similar downgrades in the past found there was no consistent trend in how stocks reacted.

“While the downgrade is disappointing, it is unlikely in and of itself to have a meaningful impact on US markets,’’ R. Thomas Manning Jr., Silver Bridge’s chief investment officer, said in a note to clients.

Even Standard & Poor’s yesterday downplayed the difference between its old AAA rating for US Treasurys, and the AA+ rating yesterday. “It’s like going from indigo to navy blue,’’ said John Chambers, who oversees S&P’s sovereign rating committee, in a conference call yesterday morning.

However, the credit agency yesterday also downgraded a number of other entities with strong connections to US government finances, including the Federal Home Loan Bank of Boston, which provides credit to community banks throughout New England. The bank declined to comment.

After the downgrade, Massachusetts Mutual Life Insurance Co., the large Springfield insurer and investment manager, said it ramped up staffing at its call centers to handle the surge it experienced yesterday. And it also recorded new messages with additional information about the situation for callers as they waited on hold.

“We have a strong capital position with more than $10 billion in surplus,’’ said spokesman Mark Cybulski.

Boston-based Fidelity Investments also increased its communication with customers, distributing both an article and video about the US debt downgrade and what it means. The company also reported a surge in call volume from anxious investors.

If Fidelity and other firms have less money to manage, that will lead to lower profits and may cause some to hold off new hires or other business expansions.

Members of Boston’s large venture capital community are already girding for a sharp slowdown of start-up companies going public, which is a key source of capital for business expansion as well as investment profit for the original funders.

Right now the funding climate has been good: Deals in Massachusetts topped $1.1 billion during the second quarter – the highest in a decade. Adam Marcus, managing director of Boston-based OpenView Venture Partners, which invests in late-stage technology companies, predicted that in the near term deals such as mergers and acquisitions will continue to get done.

“It’s not feast yet, but it’s certainly not famine,’’ he said.

To read the article in full, visit boston.com.