Worst Quarter For Stocks Since '02
Credit Turmoil Stymied Spending

By Tomoeh Murakami Tse
Washington Post Staff Writer
Tuesday, April 1, 2008

NEW YORK, March 31 -- U.S. stocks ended the first quarter with the steepest loss in nearly six years as turmoil in the financial markets showed increasing signs of spilling over into the wider economy and debate turned from whether a recession was coming to how deep it would be.

On Monday, the final day of the quarter, all major indicators rose modestly after Treasury Secretary Henry M. Paulson Jr. proposed an overhaul of the nation's financial regulatory system. Investors were also heartened by an increase in business activity in the Midwest, which still contracted but picked up slightly in March from the previous month.

But when the closing bell rang at 4 p.m., the Dow Jones industrial average of 30 blue-chip stocks stood at 12,262.89, or 7.55 percent lower than it was three months ago. The Standard and Poor's 500-stock index, a broader market measure, declined to 1322.70, down 9.92 percent, the worst performance since the third quarter of 2002.

The tech-heavy Nasdaq composite index finished at 2279.10, down 14.1 percent for the quarter.

"The turmoil in the credit market . . . was terrible in August, worse in December, and worse still this quarter," said Christopher Low, chief economist with FTN Financial. "We've priced in a recession now with a correction in stocks. But we haven't priced in a bad recession, and it's now likely that this will be one of the worst in the last 30 years."

The downturn, Low said, will be deep because it is led by a slowdown in consumer spending, which fuels two-thirds of the U.S. economy. Consumers are having a harder time accessing credit as weakened financial institutions continue to tighten lending.

The quarter started off on a panicky note with stocks tumbling on a raft of troubling economic data -- including an employment report showing the weakest job growth in years -- that heightened concerns about the economy's outlook. With retail sales falling and prices rising for such commodities as oil, investors worried about the health of consumer spending.

On Jan. 21, stock markets around the world plunged as investors became alarmed that massive losses on subprime loans to U.S. home buyers could trigger crises in overseas markets. The Federal Reserve responded by slashing a key interest rate by three-quarters of a percentage point, calming investors.

But the relief rally was short-lived. Several times this quarter, investor pessimism quickly overtook stock surges that came in response to government action.

Bad news continued to mount, with the economy posting job losses, the service sector contracting and businesses in various industries tightening their belts. As investors lost confidence, problems spread to parts of the credit market previously thought to be safe.

Municipal bond prices fell. Buyers for auction rate securities, issued by hospitals and schools to fund their debt, disappeared. Big-name funds crumbled, including one managed by Carlyle Group, a District-based private-equity giant.

And in a dramatic move, Wall Street investment bank Bear Stearns was forced to sell itself to rival J.P. Morgan Chase at a steep bargain. Bear Stearns had run out of cash as its lenders refused to do business with the troubled investment firm.

"Every time we think it's over, there's another shoe that drops," said Mark Coffelt, chief investment officer of Empiric Funds. "That's really the $64,000 question: When can people see the end of the problems?"

On Monday, Lehman Brothers, whose shares have dropped more than 40 percent this quarter, said it would sell at least $3 billion in new shares to U.S. institutions to reassure investors that it has more than enough capital.

Coffelt said investors may begin to regain confidence if first-quarter results from investment banks, due out in April, do not reveal further massive write-downs.

For the time being, analysts are eyeing economic data to be released this week, including a national survey of manufacturing to be released Tuesday and the Labor Department's March employment figures due out Friday.

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