Stocks Plunge Eight Percent on Economic Gloom

Wednesday, 15 October 2008 16:34 By Bettina Wassner, David Jolly and Sharon Otterman, The New York Times | name.

Stocks Plunge Eight Percent on Economic Gloom
Dow drops more than 700 points. (Photo: Getty Images)

    Wall Street looked beyond the government's bailout plan on Wednesday and saw more signs that the economy was in for a drastic slowdown.

    And investors sold.

    At the close, the Dow Jones industrial average was down about 735 points, or 7.9 percent, erasing most of Monday's 936-point gain. The broader Standard & Poor's 500-stock index was down 9 percent. The technology-heavy Nasdaq was down 8.4 percent, after the chip maker Intel reported a profit for the quarter but noted that sales of chips used in corporate computers were weaker than expected.

    Analysts said the market was continuing to react to the same fundamental factors that drove it lower in the morning, including weakness in the manufacturing sector, the large drop in retail sales, and the growing realization that there will be no quick fix to the credit crisis.

    Retail sales decreased 1.2 percent last month, nearly double the 0.7 percent drop that had been expected, according to one government report, while an index of New York manufacturing hit a record low in September.

    "To some degree, we've moved on from the old crisis to the new crisis. The credit crisis has been addressed to some extent, but now there's the recession, unemployment, and rising manufacturing costs in the pike," a senior index analyst and Standard & Poor's, Howard Silverblatt, said.

    "The economy is going to play itself out. There is no silver bullet," Mr. Silverblatt said. "There isn't going to be any short-term gratification on the way up."

    "It is the classic situation of losses exacerbating as the day does on," said Ryan Larson, head of equity trading at Voyageur Asset Management. "It is partially fear-based selling, and partially forced."

    The chairman of the Federal Reserve, Ben S. Bernanke, in a speech Wednesday in New York, warned that the economy faced a difficult period.

    "Our export sales, which have been a source of strength, very probably will slow," Mr. Bernanke said, adding that consumer spending and business investment remained weak.

    "Everyone was focused on the credit crisis, but behind that, we have numbers coming in showing us the economy was much weaker than expected, and continuing to get weak," Mr. Larson said. "The numbers coming out have been dire to say the least."

    Crude oil for November delivery fell $4.03 to $74.60 on concerns of the slowdown, with shares of energy companies also down. Exxon Mobil shares were down 10.4 percent and Chevron 9.2 percent. The S.& P. energy index was off more than 12 percent on the day.

    Retail shares were down on the September sales report. Wal-Mart was off 6.3 percent, Target fell 8 percent, Staples 7.7 percent and J.C. Penney 3.7 percent.

    Of even greater concern, Mr. Larson said, major manufacturing indicators are down. "If manufacturing has been the silver lining that's been holding us up to this point, it's gone," Mr. Larson said, referring to a index of manufacturing in New York State that tumbled in October to the lowest since its inception in 2001.

    The general business conditions index, released Wednesday by the New York Federal Reserve, fell to minus 24.62, from September's minus 7.41.

    Michael Holland, the chairman of Holland & Company, also cited forced liquidity selling from mutual funds, hedge funds, and margin account sellers turning their assets into cash as prices drop lower.

    Credit market indicators showed improvement, with the so-called Ted spread, the gap between yields on three-month government securities and the rate that banks charge each other for loans of the same duration, fell 6 points, to 4.30 percentage points. Analysts say a spread below 1.0 point would suggest that conditions were returning to normal.

    "There are slight signs of the credit market easing, but it's still extremely tight," Mr. Larson said. "We're not going to see the quick fix markets wanted to see. It's a process. You want to see recovery, but the only thing that's really going to help us is time. Nothing is a quick fix in this process, and that's what the market is realizing."

    Espen Furnes, a fund manager at Storebrand Asset Management in Oslo, said that there was concern about European economies softening. But despite the weak showing Wednesday, the market mood remained fundamentally one of relief, as "people are hopeful that the bailouts are going to make a big difference," Mr. Furnes said.

    "I wouldn't read too much into the numbers today," he added. "The declines are partly in reaction to investors selling after a couple of really good days."

    European markets closed substantially lower. The DJ Euro Stoxx 50, a barometer of euro zone blue chips, was down 6.4 percent, the CAC-40 in Paris fell 6.8 percent, and the DAX in Frankfurt lost 6.4 percent.

    The FTSE 100 index in London was down 7 percent after Britain's Office for National Statistics said Wednesday that the unemployment rate rose to 5.7 percent in the three months through the end of August from 5.2 percent in the previous quarter. The agency said the addition of 164,000 people to ranks of the jobless in the latest quarter was the biggest increase in 17 years.

    Tokyo shares, which soared 14.1 percent Tuesday, recovered from morning losses to close 1.1 percent higher. In Hong Kong, the Hang Seng index fell 5 percent.

    Trading in futures suggested the Standard & Poor's 500-stock index would fall about 1.5 percent at the opening Wednesday in New York. The weak showing in equity markets followed a disappointing performance Tuesday on Wall Street, when the Dow Jones industrial average was unable to sustain early gains and ended the day down 0.8 percent.

    Asian countries on Wednesday announced new measures to grapple with fallout from the crisis. Gloria Macapagal Arroyo, the Philippine president, said Asian policy makers had agreed to create a fund to help any countries suffering liquidity problems, with the World Bank committing $10 billion, The Associated Press reported.

    The agreement was reached in Washington after a meeting of finance officials from the 10-member Association of Southeast Asian Nations and their partners from Japan, China and South Korea and representatives of international lending institutions.

    After a host of European data Tuesday suggesting that the region was headed into a recession, Japan announced Wednesday that its current-account surplus shrank 52.5 percent from a year earlier, more than economists had expected. More alarming, exports during the month edged up only 0.9 percent, while imports soared 20.2 percent from a year earlier, mostly because of higher oil prices. Japan has suffered from weak domestic demand for a decade and sales overseas have been a major support to the country's economic growth.

    The dollar was mixed as the yen rose against other major currencies. The euro fell to $1.3604 from $1.3620 late Tuesday in New York and fell to 137.94 yen from 139.03. The British pound rose to $1.7485 from $1.7397. The dollar fell to 101.09 yen from 102.07 and rose to 1.1375 Swiss francs from 1.1373.


    Sharon Otterman contributed reporting.

Last modified on Friday, 12 December 2008 20:37