By Renae Merle
Washington Post Staff Writer
Tuesday, December 2, 2008
Investors were in full retreat yesterday, sending stocks tumbling after a panel of economists confirmed that the country has been in a recession for about a year.
The markets traded in negative territory all day as investors sold off shares to lock in profits after last week's rally. But the losses accelerated after the National Bureau of Economic Research, a nonprofit group, said a recession began in December 2007.
The recession announcement was expected, and many analysts have already shifted their focus to the downturn's severity and when the economy will begin to recover. They were met with more poor economic data yesterday, reflecting a deepening recession.
Every major stock index was down more than 7 percent, their biggest drops since October. The Dow Jones industrial average fell 7.7 percent, or 679.95, to 8149.09. That is its fourth-largest point drop in history and 12th-largest on a percentage basis.
The Standard & Poor's 500-stock index fell 8.93 percent, or 80.03, to 816.21, while the tech-heavy Nasdaq composite index was down 8.95 percent, or 137.50, to 1398.07.
The sell-off eroded much of the gains from last week, when the Dow and S&P 500 jumped 10 percent to 12 percent respectively. The losses spread to Asia today, with stocks in Japan down more than 5 percent in early trading.
Yesterday's losses were broad-based, with every stock on the Dow industrials closing lower. But the financial sector took some of the deepest losses. Citigroup fell 22 percent, to $6.45 a share, after rallying last week when the government announced a bailout of the firm. Bank of America was down 21 percent, to $12.85, while J.P. Morgan Chase fell 17.5 percent, to $26.12.
Financial stocks plummeted after Meredith Whitney, an analyst for Oppenheimer, said in a research report that banks remain reluctant to provide mortgages and are significantly shrinking the availability of credit card lines.
"Pulling credit at a time when job losses are increasing by over 50% year on year in most key states is a dangerous and unprecedented combination," the report said. "All of this makes for an unprecedented challenge for the banks, but what we believe will be of far greater importance will be the protracted and intense impact this will have on consumer spending."
Investors rushed into government bonds to shield them from the market turbulence. The yield on 10-year bonds fell to 2.73 percent yesterday afternoon -- the smallest yield ever issued on a 10-year bond -- from 2.92 percent Friday, while the yield on three-month Treasury bonds was down to 0.03 percent, compared with 0.05 percent. When yields on bonds fall, investors are willing to earn little on their investment in return for the safety of government bonds.
The push into government bonds came as Federal Reserve Chairman Ben S. Bernanke said his agency could buy long-term Treasury securities.
Poor economic data continued to weigh on stocks. Construction spending fell 1.2 percent in October, according to the Commerce Department. Meanwhile, the industrial downturn accelerated in November. The Institute for Supply Management's manufacturing index fell to 36.2, the lowest level since May 1982.
Though not surprising, the figures were worse than many analysts expected and another indication of the deepening recession.
The manufacturing sector has been among the healthiest parts of the U.S. economy but is now following other sectors into a rut, said Christopher Low, chief economist at FTN Financial. The U.S. data also mirror dire manufacturing figures recently released in Europe and Asia, Low said. "It tells you something about how severe the manufacturing recession is," Low said. "It is equally severe everywhere around the world; it underscores just how bad the recession is."
Investors also digested the first bit of data yesterday on the kickoff of the holiday shopping season. The National Retail Federation said shoppers spent an average of $372.57 during the weekend after Thanksgiving, up 7.2 percent from the corresponding period a year ago. But a larger portion of consumers, 39.3 percent, have already completed their shopping, indicating that traffic will "moderate" over the next several weeks, according to the survey.
Crude oil prices fell 9.5 percent, to $49.28 a barrel, on the New York Mercantile Exchange. Analysts have been concerned that the recession would continue to curtail demand for fuel and have predicted that prices could fall to $35 to $45 a barrel by the end of the year.
Exxon was down 7 percent, to $74.31, while Chevron fell 9 percent, to $72.02.
Despite the sell-off on Wall Street, Laszlo Birinyi Jr., head of Birinyi Associates in Westport, Conn., predicted that stocks would not return to the lower levels reached in October. "It is disappointing that the market did not put up a fight at all," Birinyi, whose firm studies the stock market, said in an interview. "We're still confident with our conclusion."