Fear Again Takes Over the Markets
Stocks Plunge, Nearly Wiping Out Monday's Gains, as Signs of Recession Grow Stronger

By Renae Merle
Washington Post Staff Writer
Thursday, October 16, 2008

Investors fled stocks again yesterday as a wave of grim economic data hit the market and set off a stampede to the exits in the final hour.

The Dow Jones industrial average nearly wiped out Monday's historic 936-point rally, falling 7.87 percent, or 733.08, to close at 8577.91. It was the second-largest point loss in the Dow's more than 100-year history, ninth-largest on a percentage basis.

The Standard & Poor's 500-stock index, a broader measure widely watched by market professionals, was off 9 percent, or 90.17, to close at 907.84. It was its largest loss on a percentage basis since the 1987 crash. Three of the S&P's 10 largest percentage losses have come in the past month. The tech-heavy Nasdaq composite index was down 8.47 percent, or 150.68 points, to close at 1628.33.

Wall Street's tumble followed sharp declines in Europe. London's FTSE 100 and the CAC 40 in Paris were down about 7 percent, and Germany's DAX fell 6.5 percent yesterday. The losses spread to Asia today, as stocks in Japan fell 10 percent in early trading and South Korea's currency dropped as much as 12 percent against the dollar.

After Monday's U.S. rally, analysts expected some selling as traders took profits but had hoped that investors would find comfort in the latest government attempts to stabilize the financial sector. But credit markets remained tight despite the efforts. Investors focused on a bleak consumer spending report from the Commerce Department for September which reinforced fears that the country is slipping into a recession. Consumer spending makes up two-thirds of economic activity, and analysts now predict a dismal holiday season in the malls.

Retail sales were down 1.2 percent in September, the steepest monthly decline in three years.

"I think anybody who expects retail sales or consumer sentiment to be positive is delusional. The expectations were bad, and they were met," said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel.

Also, wholesale prices fell 0.4 percent in September, according to the Labor Department. But excluding food and energy, wholesale prices rose by 0.4 percent.

Investors' concerns were reinforced by the Federal Reserve's release of its "beige book," information about the economy from its 12 regional banks, which found economic activity weakening and manufacturing slowing in most places. Fed Chairman Ben S. Bernanke also said that government efforts to rescue the economy will not work immediately.

"Despite the good news as far as [the government] addressing the problems, the market doesn't have a feel for how low low is and how deep the recession will be," said John Wilson, co-director of equity strategy at Morgan Keegan, a Memphis investment firm. "As much as I am itching to step in here, I don't know whether it's here or 500 points below here."

Investors have also grown nervous about a flood of grim earnings reports. J.P. Morgan Chase and Wells Fargo both managed to turn a profit in the third quarter, but their balance sheets showed the impact of the financial crisis.

J.P. Morgan's profit tumbled 84 percent, to $527 million, during the quarter. It was dragged down by the cost of its acquisition of Washington Mutual, increasing losses from mortgage investments and boosting its loan-loss reserves. Wells Fargo recorded profit of $1.64 billion, down nearly 25 percent from the year-ago period.

J.P. Morgan closed down 5.5 percent, at $38.49. Wells Fargo was down 0.5 percent at $33.35.

Expectations that the economic slump would continue to hurt demand pushed oil prices down again yesterday. A barrel of light, sweet crude fell 5.2 percent, or $4.09, to $74.54 on the New York Mercantile Exchange. This is the first time crude oil has closed below $75 a barrel since August 2007. Some analysts now expect prices to fall as low as $50 a barrel this year.

Correspondent Blaine Harden contriuted to this report from Japan.

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