Fears of Recession Deepen Rout
Stock Decline Sweeps Through All U.S. Sectors and Pummels Asian Markets

By Renae Merle, Michael A. Fletcher and Neil Irwin
Washington Post Staff Writers
Friday, October 10, 2008

Fear and foreboding took hold on Wall Street yesterday, as the stock market again plunged and investors became convinced that the nation is on the verge of a deep and prolonged recession. The rout continued in Japan, where stocks plummeted in early trading today.

The government took steps toward an extraordinary public investment in U.S. banks, and General Motors stock fell to its lowest price since 1950 on fears it will not be able to weather the downturn. Share prices fell across every industry and for each of the 30 stocks in the Dow Jones industrial average, which was down 679 points, or 7.3 percent, to 8579.19.

But the plummeting stock market could not be blamed on any single piece of horrible news -- there were no additional bank failures or government bailouts or corporate bankruptcies.

"I've never seen a panic like this," said David Wyss, chief economist at Standard & Poor's. "I've seen stock market drops, but not an overall panic."

The broad Standard & Poor's 500-stock index fell 7.6 percent, the seventh consecutive day of misery on Wall Street. The index has now fallen 42 percent from its all-time high one year ago yesterday and 22 percent this month alone. Stocks are on track for their worst calendar year since 1937.

Fear from Wall Street flooded Asia today, where markets were sharply lower in early trading. Japan's benchmark Nikkei average plunged more than 10 percent in the morning session, while Australian markets slid more than 7 percent and South Korean stocks fell as much as 8 percent.

"It's a domino effect. Stocks are falling out of bed. There is distrust in the market and distrust in the government that is trying to heal this," said Peter Cardillo, chief market economist with New York-based Avalon Partners.

Investors pulled a record $72 billion out of stock and bond mutual funds in September, the research firm TrimTabs said yesterday, and in the past week alone took out $52 billion.

Continuing its efforts to stanch the damage, the Bush administration yesterday said it was working on a plan to inject government cash into some of the nation's troubled banks. It may brief congressional leaders as early as today. Meanwhile, global economic policymakers are gathering in Washington today for the International Monetary Fund and World Bank annual meetings and will seek coordinated responses.

President Bush, who has said little publicly during this week's prolonged market dive, is scheduled to make a statement about the crisis this morning in the Rose Garden, the White House said late yesterday. He also will take the unusual step of meeting with finance ministers from the Group of Seven industrialized countries Saturday.

Press secretary Dana Perino said Bush would "assure the American people that they should be confident that economic officials are aggressively taking every action to stabilize our financial system."

While the stock market was the most visible sign of the distress, a more significant one may have been a rise in interest rates for short-term lending among banks. The spike came despite Wednesday's cut in the target interest rate of the world's major central banks, suggesting that banks are more fearful than ever of lending to each other.

Credit markets provided modest good news, however, as the interest rates dropped on commercial paper, a form of debt that companies use to finance short-term cash flow. The Federal Reserve announced a new program to take on that debt Tuesday morning.

Some of the worst damage was sustained by U.S. automakers. J.D. Power and Associates said that the global auto industry may experience an "outright collapse" in 2009. Then the S&P Ratings Agency put General Motors debt on a credit watch. GM stock fell 31 percent, to $4.76, its lowest level since 1950, and Ford stock was down 22 percent.

Investors have become frustrated that the government's efforts to tackle the financial crisis, including plans to buy up billions in toxic mortgage debt and a global interest rate cut, have yet to loosen the credit markets.

"Everyone applauds [the government efforts]. The fearful part is that nothing has taken hold," said Bart Barnett, head of equity trading at Morgan Keegan, based in Memphis. "None of it seems to stop the free fall in the market."

The problem seems to be that many of the government actions, such as a the $700 billion U.S. financial system bailout passed a week ago, take time to go into effect.

"These programs take weeks if not months to implement, and the market is responding within minutes," said Diane Swonk, chief economist at Mesirow Financial.

Meanwhile, darker clouds have moved to new parts of the economy. Trouble in sectors like steel production and heavy machinery, which until recently were growing strongly, has contributed to the mounting view that the U.S. economy has tumbled into a significant recession.

Economists now widely predict that the economy will contract until the middle of 2009. If that holds true, it would mark the nation's longest period of economic decline since the downturn that ended in 1975.

"Some time ago we expected a more mild downturn, but this is a pretty serious recession," said Abiel Reinhart, an economist with J.P. Morgan Chase.

The nation is still absorbing steep declines in home construction, an industry that shed 35,000 jobs in August alone. Sales of clothing and shoes are down, as is spending on recreational outlets -- including casino trips, nightclubs and sporting events -- according to Commerce Department data.

Factory orders were down in August by 3.5 percent, a decline that included products such as computers, pharmaceuticals and iron and steel. Demand for steel is dropping as the global economy cools and the domestic market for cars and appliances shrinks.

"The market was booming from early this year until July," said Christopher Plummer, managing director of Metal Strategies, a consulting firm. "Now we are looking at one of the worst situations the industry has faced in some time."

There is a bright spot for American consumers: Oil prices also continued a steep two-month decline yesterday, falling $2.36 to $86.59 a barrel as traders bet that the slowing global economy will reduce demand for energy worldwide. That should eventually flow through to American consumers' gasoline bills and could boost consumer spending.

But even that was bad news for the stock market, as energy shares fell. Exxon Mobil dropped 11.7 percent, and Chevron fell 12.5 percent.

As the damage spread, financial stocks continued to take a beating. Citigroup and Wells Fargo, which have been fighting for control of Wachovia, were down 10 and 17 percent respectively. Citigroup walked away from the Wachovia deal yesterday, but said it would pursue a lawsuit against Wells Fargo's bid.

Morgan Stanley continued to suffer from concerns that Mitsubishi UFJ Financial Group may abandon plans for a $9 billion investment in the firm and fell 26 percent. Morgan Stanley had said closure of the deal was imminent.

"You're looking at an entire sector that will be associated with volatility for a continued period of time," said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati. "They are trading, not investing. They are looking to make quick investments. They are not investing for a two- to three-year period. They are investing for a two- or three-hour period."

The drop in financial shares also follows the end of a three-week Securities and Exchange Commission ban on short-selling in that sector. A short sale is a bet that a stock will fall, and some corporate executives have blamed the practice for depressing their stocks. "I would image that's adding a little bit to the volume," Cardillo said.

IBM said that profit grew 20 percent, to $2.8 billion, during its third quarter and that it expects its results to hold up despite the financial crisis. After showing gains most of the day, IBM's stock closed down 1.7 percent, or $1.55 a share, falling to $89.

"Everybody knows when we start to see third-quarter earnings, it's not going to be a pretty sight," said Joseph Brusuelas, chief U.S. economist at California-based Merk Investments. He said today's earnings report from industrial stalwart General Electric is "the ultimate bellwether."

The Federal Reserve's announcement that American International Group would need an additional $37.8 billion loan on top of the $85 billion it received last month weighed down that sector. AIG was down 25 percent, while competitor Prudential Financial was down 23 percent.

Staff writer Dan Eggen and correspondent Blaine Harden in Seoul contributed to this report.

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