Stocks plunge as U.S. trade deficit is wider than expected

By Ariana Eunjung Cha and Sonja Ryst
Washington Post Foreign Service
Thursday, August 12, 2010

A wide-ranging sell-off on Wall Street sent stocks into the red for the year Wednesday after unexpectedly bad economic news from three continents reinforced fears that the global recovery is faltering.

In the United States, the Commerce Department said the trade deficit had widened 18.8 percent, to $49.9 billion -- a figure so large it sent economists scrambling to revise their growth forecasts for the quarter and predicting that unemployment may increase later in the year.

In China, which many had hoped would help save everyone else with its spending, the government statistics office released numbers showing that its economy was cooling rapidly. And in Britain, which had been a bright spot for the world economy in recent weeks, the central bank warned of a "choppy recovery" and scaled back its growth estimates.

The barrage of worrisome government data sent the Dow Jones industrial average down 265 points, or 2.5 percent from the previous day -- the worst daily decline in more than a month. All 30 component stocks were lower. The Standard & Poor's 500-stock index -- a broader measure -- sank 2.8 percent, and the tech-heavy Nasdaq composite index dropped 3 percent.

The steep decline in the U.S. markets followed falls in Europe, where key stock indexes slid between 2.1 and 2.7 percent, and in Asia, where Japan's Nikkei fell 2.7 percent.

The bond, commodities and currency markets were no less volatile. Investors drove yields on 10-year Treasury notes to one-year lows. They sold off oil, tin and copper. And they pushed the dollar to a 15-year low against the yen.

Investors were also reacting to the about-face by the Federal Reserve on Tuesday in its efforts to wind down aggressive measures to boost the economy. The Fed announced that it would use money from maturing mortgage-backed bonds to buy government bonds. The central bank hopes this will help cut interest rates on mortgages and other loans, which might increase borrowing and encourage growth.

While the fact that the Fed may be open to bolder steps if the economy weakens further could be seen as positive, investors took it as a sign that its confidence in the recovery had dimmed.

"The Fed didn't say anything to us to quell our concerns about the double-dip" recession, said Linda Duessel, equity market strategist at Federated Investors in Pittsburgh.

Peter Boockvar, an equity strategist for Miller Tabak, pointed out that Wall Street panics when the Fed does something and then panics because the Fed has to do something.

"If one of the Fed's goals in yesterday's statement was to instill confidence in the market that they will do anything to make things better, they accomplished the exact opposite in that today we are even more worried about economic growth not only by the recent data but by the constant desire on the part of the Fed to do something," Boockvar wrote in a research note to investors.

The Obama administration on Wednesday announced more aid for distressed homeowners and the signing of a bill that the White House said would help create jobs and strengthen manufacturing as a key driver of the economic recovery, but the moves did little to stop the sell-off.

CONTINUED     1        >

© 2010 The Washington Post Company