Economic Mood Darkens, and Declines Deepen
Wednesday, October 8, 2008
U.S. stocks plummeted in another dismal day of trading yesterday after Federal Reserve efforts to stabilize the market failed to offset concerns that the economy had weakened further, placing new stresses on major banks and consumers.
The sell-off was broadly felt. On the New York Stock Exchange the proportion of stocks whose prices fell outnumbered gainers by more than 7 to 1.
The Dow Jones industrial average declined 5.1 percent, or 508.39, to 9447.11. The technology-heavy Nasdaq composite index and the broader Standard & Poor's 500-stock index also slid steeply. The Nasdaq closed at 1754.88, down 108.08, or 5.8 percent. The S&P 500 finished below 1,000 for the first time in five years, closing at 996.23, down 60.66, or 5.7 percent.
The day started with a brief surge after the government announced that it would buy short-term debt of large companies, helping fund their day-to-day operations.
But the indexes began to slide when Federal Reserve Chairman Ben S. Bernanke gave a speech on the health of the economy and said another interest rate cut may be necessary. By the end of the trading day, sentiment had clearly turned as investors worried that U.S. efforts would not be enough to avoid a global recession, especially as the credit crisis spread to Europe's banking system.
"At least a part of the market sell-off is in response to the Fed commentary today that the economy has weakened, which in our view is a confirming statement given the economic data over the last few weeks," said Christopher Versace, portfolio manager for Agile Capital Management, a Virginia hedge fund.
The government released fresh data illustrating the strains on U.S. consumers. A Federal Reserve report found that for the first time in 10 years, consumer borrowing declined as banks shut off access to loans and consumers scaled back spending in August, before the financial crisis struck in earnest.
"That is a sure sign that the consumer is beginning to capitulate on her level of consumption," said Joseph Brusuelas, chief U.S. economist at Merk Investments. "What we expect to see is more saving and less spending going forward."
The Dow also was weighed down by the financial sector, led by a 26 percent decline in shares of Bank of America. The large consumer bank said late Monday that net income fell 68 percent, to $1.18 billion, during the third quarter and that it would cut its dividend in half to preserve cash. Bank of America recently acquired Countrywide, the large mortgage lender, and is in the process of buying Merrill Lynch. It now needs to raise $10 billion in capital to avoid a cash crunch.
Bank of America's problems spurred concerns that weaker players in the banking sector would reveal deeper losses than expected when they begin to report earnings during the next week, analysts said. Bank of American was considered to be "the strong component, and here they are having a problem," said Doug Roberts, chief investment strategist for Channel Capital Research.
Morgan Stanley fell 25 percent on rumors that Mitsubishi UFJ Financial Group may abandon plans for a $9 billion investment. But the firm rebutted the gossip, issuing a statement that the deal had received key regulatory clearances.
Oil prices got a bounce after falling more than $6 a barrel Monday to their lowest level in months. Light, sweet crude oil was up $2.25, to settle at $90.06 a barrel on the New York Mercantile Exchange. The price of gold, a traditional safe haven during market turmoil, was up almost 2 percent, or $15.70 an ounce.
Meanwhile, European governments continue to scramble to restore confidence in the continent's banking system. Germany is drafting an intervention plan to secure the country's banking sector, while European finance ministers are doubling the guarantee on bank deposits, to $68,000.
"The Fed is now the buyer of last resort. That has eased concerns somewhat," said Brusuelas of Merk. "But there are still problems in Europe, and many in the market are coming long last to the realization that this is going to take years to unwind."