By Tomoeh Murakami Tse
Washington Post Staff Writer
Friday, November 2, 2007
NEW YORK, Nov. 1 -- Bad news from some of the biggest U.S. companies reignited investor fears about the shakiness of the credit market Thursday, sending stocks tumbling just a day after the Federal Reserve cut a key interest rate to prevent a broad economic downturn.
The three major stock market indicators finished the day down by more than 2 percent as money poured into safer investments. The Dow Jones industrial average fell more than 362 points, its fourth-worst trading day of the year.
The declines were sharp enough to trigger automatic trading curbs at the New York Stock Exchange, designed to limit wild market swings. The Federal Reserve added $41 billion to the financial system to help keep it operating smoothly, making it the biggest injection of funds since Sept. 11, 2001, attacks.
The sell-off was triggered in part by analysts' reports that downgraded Citigroup, the world's largest bank, and said it was short on capital. That unnerved investors who were already upset by Merrill Lynch's announcement last week that it would write down $8 billion in mortgage-related securities for the third quarter, about $3 billion more than it had acknowledged three weeks earlier. Citigroup, considered a bellwether of the financial sector, had write-downs of nearly $6 billion for the quarter.
"The news on Citigroup has spooked the entire market," said Bart Barnett, head of equity trading at Morgan Keegan. "Everyone wanted to think it was over. Everyone wanted to think there was light at the end of the tunnel. . . . But everyone is writing down billions and billions of dollars. If it's of greater intensity at Merrill, and [the analysis of] Citi comes to fruition, who knows who else is out there? People are saying, 'Wow, who's next?' "
Other financial companies disclosed serious problems. Radian Group, a major mortgage insurer, Thursday reported its first quarterly loss ever, and Credit Suisse announced a 31 percent drop in profit.
Adding to the disappointment was Exxon Mobil, the world's largest publicly traded oil company, which reported earnings below Wall Street expectations despite record high crude oil prices. Shares of the company fell 3.8 percent, while Citigroup stock lost 6.9 percent.
The negative mood was reinforced by a series of economic data reflecting how housing and credit market woes are bleeding into the broader economy.
The Commerce Department said Thursday that consumer spending, which makes up two-thirds of the U.S. economy, grew by a slower-than-expected 0.3 percent in September, after rising 0.5 percent in August. So far, economists have been pleasantly surprised by the resilience of consumers, although many have warned that it cannot hold up as energy prices soar and home prices continue to soften.
"It was consumer spending and foreign economic growth that largely fueled U.S. economic activity this year," said Bernard Baumohl, managing director of the Economic Outlook Group. "If Americans start to cut back on spending and foreign economic growth slows before the housing sector has a chance to recover, then this expansion could well be in jeopardy."
Separately, an index of the U.S. manufacturing industry showed that activity at plants and factories grew in October at the slowest pace since March as companies dealt with rising costs, lower production and rising inventory. It was the fourth straight month that manufacturing has slowed.
The downturn on Wall Street followed a much-anticipated move by the Fed's policymaking committee, which Wednesday lowered the federal funds rate, or the rate at which banks lend to one another, to 4.5 percent. The Fed followed up Thursday with a $41 billion infusion into the financial system, but economists cautioned against reading too much into the timing and size of the operation.
"The size does catch your eye, but it's what they needed to do to keep the Fed funds rate down to 4.5 percent," said Stuart Hoffman, chief economist at PNC Financial Services Group.
The losses Thursday in the stock market wiped out gains from the previous day, when investors cheered the Fed move and sent the Dow up 137 points.
Throughout the summer's credit freeze, jittery investors were overcome by a notion that bad news was just around the corner. With no major surprises and signs of thawing in several areas of the credit market, investors had begun to look at events of the summer in the rearview mirror. They are learning now that the tentacles of subprime mortgages, at the epicenter of the credit problems, are far-reaching.
Market strategists said Thursday's decline on Wall Street came as investors digested overnight the Fed's policy statement from Wednesday, which noted concerns about inflation and appeared to preclude further cuts.
"Oftentimes, the day after is a choppy ride because the full extent of the news settles in on us," said Art Hogan, chief market analyst at Jefferies. "We were very excited yesterday about the fact that the Fed cut. That's what we wanted and expected. We celebrated that. But as we sort of wake up today and say, 'Wait a minute, they took the punch bowl away' . . . that takes away the guarantee that we had in this market that they're going to continue to cut interest rates again."
The Dow, made up of 30 blue-chip stocks, fell 362.14, or 2.6 percent, to close at 13,567.87. The Standard & Poor's 500-stock index, a broader market measure, fell 40.94, or 2.6 percent, to 1508.44. The tech-heavy Nasdaq composite index fell 64.29, or 2.3 percent, to 2794.83.
Staff writer Howard Schneider contributed to this report.