Thursday, August 4, 2011

Stocks spiraled downward Thursday as investors buckled under the strain of the global economic slowdown and the failure of policy makers to stabilize financial markets.
The selling began in Europe and continued in the U.S., where stocks plunged from the opening bell. The Dow Jones Industrial Average posted its worst point drop since the financial crisis in December 2008, falling 512.76 points, or 4.31%, to 11383.68. Oil and other commodities were also hammered. Even gold was a safe haven no more as prices fell. Tokyo's market slid on Friday morning, falling more than 4% in early trading.
"It was an absolute bloodbath," said John Richards, head of strategy at RBS Global Banking & Markets.
There was no one single catalyst for the downdraft, traders said. Rather it reflected multiple concerns that have mounted over the past month and came to a head this week. Worries about a U.S. default, settled by a last-minute fix to lift the country's debt limit on Tuesday, have given way to broader fears about the failing health of the domestic economy. That will lead to close scrutiny of Friday's jobs report.
Investors are also questioning how much longer the recent run of strong corporate earnings can continue. Amid other troubles, corporate profits have been a rare bright spot.
In Europe, leaders are grappling with a widening debt crisis, which started in Greece and spread to Italy and Spain. An earlier bailout of Greece now appears insufficient. There are growing concerns about European banks and their heavy investments in the debt of countries with big fiscal problems.
The nervousness among investors is being reflected in the extraordinary rally in U.S. Treasury bonds, regarded as a safe haven for investors in times of turmoil. The yield on the 10-year Treasury note, which falls as prices rise, tumbled to just 2.46% at 3 p.m. Thursday, the lowest since October of last year.
The carnage in stocks was the Dow's ninth down session in the past 10. With losses totaling 11.1% from its 2011 high hit in April, the index has entered official "correction" territory.
The Dow's decline was its biggest point drop since the market was plunging amid a crisis of confidence in banks in late 2008. On Thursday, the focus has shifted to world governments, which are laboring under mountains of debt and have diminished ability to prop up the financial system.
"I'm just sorry to see my retirement going to hell," said Robert Slocomb, an 82-year old retired Kodak optical engineer in Rochester, N.Y. Mr. Slocomb blamed the government's handling of the economy for the stock market's woes.
In the first half hour of trading Thursday the Dow lost 1.3% and by noon the widely followed benchmark was down more than 2.7%. Most of the selling appeared to be from longer-term stock investors, rather than hedge funds, which have mostly been in a defensive mode for the last several months.
For a time during the afternoon stocks stabilized with traders wondering if bargain hunters had come on the scene. But the selloff soon resumed.
Wall Street firms had little appetite for holding stocks and other riskier investments on their books, and their traders dumped stocks into the closing bell. The Dow lost more than 155 points in the last hour of trading.
Some traders said the plunge put the market more in sync with the state of the U.S. economy. "The market sold off 500 points, it's not a crash, it's a small correction," said Stephen Holden, a floor trader at the new York Stock Exchange. "It's overdue…I think there's more to go."
"In this environment, no one wants to catch a falling knife," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management.
Volume on stock exchanges has spiked in recent days, a sign that more investors are piling into selling. For much of the year, volume had been weak as many investors stood on the sidelines. Some 7.5 billion shares changed hands in NYSE composite trading, the highest since May of last year, when investors were also fretting about European debt and the U.S. economy.
The Chicago Board Options Exchange Volatility Index, known as the "fear gauge," broke above 30 for the first time since March 16, rising 35% to 31.66. A higher reading suggests increased volatility in markets, and nervousness among investors. Still, that's a far cry from the depths of the 2008 crisis, when the so-called VIX almost reached 100.
Investors have grown frustrated with efforts by policy makers to deal with the challenges posed by big overhangs of government and consumer debt. "Their solutions are too late and no one is taking a longer-term, more-considered approach to problems," said Benjamin Segal, head of global equities at asset manager Neuberger Berman.
In the U.S., investors fear the economy could be heading for a double-dip recession. The Federal Reserve is seen as limited in its ability to provide yet another shot in the arm. Interest rates are already essentially at zero and two rounds of quantitative easing, in which the Fed pumped $2.3 trillion into the financial markets, failed to get the U.S. economy strong enough to stand on its own. Meanwhile, given the push to trim deficits, significant economic stimulus from the U.S. government is seen as unlikely. "You look at monetary and fiscal policy and it's very hard to find a powerful lever that somebody can pull," said Mr. Richards of RBS.
Investors have been equally underwhelmed by the official response to the European debt crisis. That was the case on Thursday when the European Central Bank outlined steps to shore up confidence in European banks in the face of deteriorating conditions in the bond market.
The ECB also conducted purchases of bonds, traders said, but that may have backfired. Traders said the ECB bought Irish and Portuguese bonds, but didn't appear to buy bonds from Italy or Spain, countries which are seen as most at risk from the spreading crisis.
The ECB's efforts came on the heels of the steps by the Swiss National Bank and Bank of Japan to halt the rise of the Swiss franc and Japanese yen, respectively. Investors weren't convinced that either moves will have much long-term success. "There's the idea that they are pushing against a string," says Robert Lynch, head of currency strategy for the Americas at HSBC.
—Jonathan Cheng contributed to this article


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