Dow Dives More Than 300 Points; S& P and Nasdaq Also Plunge
By Tomoeh Murakami Tse and Frank Ahrens
Washington Post Staff Writers
Friday, July 27, 2007
The U.S. stock market yesterday suffered its second worst day of 2007, with the Dow Jones industrial average plunging more than 300 points as anxiety over housing and increasing evidence of weakness in the lending market spilled over into stocks.
Investors fled from almost every type of stock, hunkering down with U.S. Treasurys and other safer investments.
It was the biggest drop in stocks since easy access to credit, the economy's engine in recent years, began showing signs of drying up several months ago. The problems started when investors in securities backed by risky mortgages were hurt by the housing downturn earlier this year, making them worried about other debt-related products such as those that finance corporate takeovers.
Fueling the sell-off in stocks yesterday were poor earnings reports by three major home builders, an announcement from the nation's second-largest mortgage lender that it was shuttering a previously lucrative division and a dismal report on new-home sales, all evidence that the housing slump may last longer and be more painful than the market had expected.
"Markets are imploding," Sal Morreale of Cantor Fitzgerald said from his trading desk in Los Angeles. "A lot of people have been calling for this for a long time. You're finally starting to see reality."
The Dow fell 311.50 points, or 2.3 percent, to close at 13,473.57. It was the biggest one-day drop since Feb. 27, when the blue-chip average of 30 stocks lost 416 points. At one point yesterday afternoon, the Dow had dropped nearly 450 points.
The Standard & Poor's 500-stock index, a broader market measure, fell 35.43 points, or 2.3 percent, to 1482.66. The tech-heavy Nasdaq lost 48.83, or 1.8 percent, to 2599.34.
The losses took place less than a week after the Dow rode a wave of strong corporate earnings, surging past the 14,000 mark for the first time. Yesterday's sell-off occurred despite positive earnings reports from key companies such as Ford.
The slide was sharp enough to automatically trigger trading curbs at the New York Stock Exchange that are designed to limit wild swings in trading. Stocks that fell outnumbered those that gained by 13 to 1.
The decline also sent Asian markets lower. Tokyo's Nikkei 225 was down 2.4 percent this morning.
Financial-services firms were particularly hard hit in the United States yesterday, reflecting investor concern over the changing conditions in the lending market. Shares of Goldman Sachs and Bear Stearns dropped nearly 4 percent.
Treasury Secretary Henry M. Paulson Jr. yesterday downplayed concerns about a broader market meltdown. "Risk is being repriced and that's leading to some volatility," Paulson said, adding that "we're fortunate we have a very strong global economy and a healthy economy in the U.S."
A long period of easy credit produced "excesses" in the markets and led to "disciplines getting relaxed," Paulson said. "I think what we've got is a wakeup and we all need to be vigilant."
Some analysts said they saw yesterday's plunge coming for several months. "As one of my colleagues put it, it was a question of picking up nickels in front of a steamroller," said Thomson Financial analyst Jeoff Hall. "Now, those hands are getting rolled over. It was bound to happen."
The global flow of easy credit has buoyed the stock market in recent years, supplying borrowers with cheap money to finance homes as well as companies' buyback of shares.
But this summer has seen increasing signs that that spigot may be turned off. Investors have spurned bonds and loans sold by Wall Street to finance corporate buyouts. This week, investment banks handling the sale of Chrysler had to postpone a $12 billion debt offering. This has left the banks holding that debt on their books, at least for the time being.
"We have risk of credit contagion spreading . . . and markets are figuring that risks are rising particularly in the financial sector," said David Kotok, chief investment officer of Cumberland Advisors.
Higher oil prices also made investors jittery. The price for a barrel of crude oil on the New York Mercantile Exchange touched $77 for the first time this year, before closing lower. Energy stocks were hurt, with Exxon Mobil reporting lower-than-expected earnings.
Money managers were split on how much the credit market will tighten. Some said the situation is no more than a blip, but others cautioned more market bumps are ahead as the housing market worsens.
Yesterday, Wells Fargo, the nation's second-largest mortgage lender, said it would close its subprime wholesale lending business because the market for risky home loans is too volatile.
Three home builders -- Beazer Homes, Pulte Homes and D.R. Horton -- reported quarterly losses.
Sales of new homes dropped 6.6 percent in June, the Commerce Department estimated yesterday, a steeper drop than was forecast. Sales of all homes were off 22.3 percent in June, compared with June 2006.
Portfolio manager Neil Hennessy blamed yesterday's drop on a "market that is becoming a little irrational on a short-term basis."
Recent days have seen some solid corporate earnings reports, including a surprise profit from automaker Ford yesterday, its first in two years, attributed to cost-cutting and surging overseas sales.
Hennessy said the effects of the subprime crash are contained to the housing sector and would not ripple outward into the broader economy.
"There were a lot of people taking out loans with no intention of repaying them and investors are getting stuck with them," said Hennessy, president of Hennessy Funds. "That's not going to take down a [geographic] region."
Mark Kiesel, executive vice president at Pimco Bonds, said the housing market will bottom out over the next six to 18 months. The large number of unsold homes on the market will only grow when foreclosed houses come on the market in coming months, he said.
"It's going to lead to slower job creation, weaker corporate profit growth, tighter lending standards and weaker confidence," he said.
Staff writer Lori Montgomery contributed to this report.
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