In Free-Fall, Stocks Hit Lowest Mark Since '97

By Neil Irwin
Washington Post Staff Writer
Tuesday, March 3, 2009

The global financial rout worsened yesterday, driving U.S. stocks to their lowest level since 1997 amid deepening questions about whether governments around the world are being forceful enough in combating the economic crisis.

There was no single cause for yesterday's sell-off, which sent each of the major indicators down at least 4 percent, with the Dow Jones industrial average closing below 7000 for the first time in 12 years. Investors were shaken by another government rescue of insurance giant American International Group, which said it would take on $30 billion more in public money after reporting the largest quarterly loss in U.S. history. The markets were also absorbing news from the weekend from famed investor Warren E. Buffett, who said the economy will be "in shambles" this year and who reported the worst investment returns in the 44 years he has run Berkshire Hathaway.

But more than any individual development, the continuing collapse in financial markets around the globe reflected an absence of faith that the trillions of dollars that governments have deployed to try to contain the damage will do the trick -- and a realization that, from Europe to Japan to the Americas, the flow of goods and services is drying up.

"People are really coming to terms with the fact that we not only have a global slump, but one that's going to be prolonged," said George Feiger, chief executive of Contango Capital Advisors. "And there's a lack of coherence to the global response. In Japan, the government is paralyzed, in Europe the absence of a central government is crippling their ability to conduct coordinated policy, and the U.S. government has taken some dramatic actions, but always too little too late."

Yesterday, the fallout from the economic crisis also touched the Washington region, which has been less vulnerable to recessions in the past. Sunrise Senior Living, the assisted-living giant based in McLean, said it was working with its lenders to try to avoid bankruptcy protection. Allied Capital, the District buyout firm that defaulted on its debt agreements last month, recorded a $579 million loss for the fourth quarter and said its chief executive would resign.

Whatever turmoil U.S. companies are experiencing, the damage increasingly appears worse in many other parts of the world. Financial markets are starting to grapple with the realization that major Western European banks are more exposed to real estate losses in Eastern Europe and Russia than had been previously realized. Yesterday, HSBC, the British bank that has been viewed as one of the strongest throughout the financial crisis, reported a 70 percent drop in 2008 earnings. It said it would raise $17.7 billion in new capital, cut 6,100 jobs and abandon much of its U.S. consumer lending business.

Major world stock markets lost 4 to 5 percent yesterday. In the United States, stocks are down 22 percent this year and 55 percent from their peak in 2007, as measured by the Standard & Poor's 500-stock index. Money gushed into safe Treasury bonds yesterday, driving down their yields. The dollar registered major gains against the euro as investors concluded that, for all the problems in the U.S. economy, it looks better than the rest of the world.

The deterioration in financial markets comes, ironically, as companies have proven more able to issue debt in recent weeks than in late 2008, and as bank lending rates move toward normal levels.

"The credit markets have healed some, but the view of the economy has been radically revised down," said David Shulman, senior economist with the UCLA Anderson Forecast.

There was a glimmer of good economic news yesterday. The Commerce Department reported that consumer spending rose 0.6 percent in January, its first increase since June. Personal income rose 0.4 percent. Those numbers, while a pleasant surprise, were of little comfort to analysts.

"The gains do not reflect an improvement in the fundamental economy," Stuart Hoffman, chief economist of PNC Financial Services Group, said in a report. He noted that personal income got a boost from the cost-of-living adjustment to Social Security and government wage increases kicking in at the beginning of the year. And spending rose in part because higher gas prices increased sales at service stations.

Americans saved 5 percent of their income in January, continuing a steep increase. That rate was zero as recently as last April. In the long run, it is desirable for Americans to save more. But in the short run, increased savings mean less spending, which deepens the recession.

In other economic news, the Census Bureau reported yesterday that the construction industry has continued its rapid descent, with spending on nonresidential construction -- office buildings, hotels and retail, for instance -- dropping in January more than it has in 15 years.

Separately, the Institute for Supply Management released its February survey of manufacturing firms. Factories pulled back on production for the 13th straight month, though at a slightly less severe pace than in January. Inventories rose, a sign that unstocked goods were accumulating in manufacturers' warehouses.

Beyond economic news, there could be technical reasons for Wall Street's continued losses.

Feiger, whose company advises wealthy individuals on how to manage their money, argues that hedge funds and other big investment entities that use borrowed money are experiencing massive withdrawals from investors, forcing them to liquidate holdings. With few buyers out there, Feiger argues, this selling is helping push stock and other prices down rapidly. He noted that the brokerages that serve those funds say they are not using all of their borrowing capacity.

"It's taken a long time for people to accept that we have got a big financial mess and a terrible recession," Feiger said. "Now there's a much better understanding that we're not going to go back to business as usual for a considerable period of time."

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