Fears on global economy sink U.S. stocks

Traders on the New York Stock Exchange floor. The debt crisis in Ireland put a damper on the market.
Traders on the New York Stock Exchange floor. The debt crisis in Ireland put a damper on the market. (Brendan Mcdermid)
Industrial production percentage change from preceding month, seasonally adjusted
By David S. Hilzenrath
Washington Post Staff Writer
Wednesday, November 17, 2010

The stock market continued its recent slide Tuesday amid deepening investor anxiety about the global economy.

Wall Street was worried that Ireland could require a bailout, that China will jam the brakes on its overheating economy and that the Federal Reserve's latest effort to boost the U.S. recovery could do more harm than good.

The Dow Jones industrial average fell 1.6 percent to close at 11,023.50; the Standard & Poor's 500-stock index fell 1.6 percent, to 1178.34; and the Nasdaq composite index fell 1.8 percent, to 2469.84.

For the S&P, a broad market gauge, it was the steepest percentage decline since mid-August.

The S&P has lost 3.9 percent of its value since Nov. 5. But before that, it had been roaring. Fed Chairman Ben S. Bernanke appeared to set the rally in motion Aug. 27, when he signaled that the Fed was considering going on an asset-buying spree. From just before the speech to the close of trading Nov. 5, the S&P had gained 17.1 percent.

The retreat can be explained partly by the adage that Wall Street buys on the rumor and sells on the news, or in this case, that it bought on anticipation of the Fed's intervention and sold when the Fed finally got around to intervening.

There has also been an element of profit-taking, especially as money managers try to lock in gains before the books close on 2010 and they have to send year-end statements to their clients.

Some investors have criticized the Fed's strategy of essentially printing dollars to goose the economy, arguing that it seems ineffective in the short term and could contribute to problems such as inflation over the longer term.

Dan Cook, chief executive of IG Markets, a trading firm, compared it to pouring gasoline on a cold log: Without the spark of demand from borrowers who can qualify for loans, he said, it can't ignite economic growth.

"The problem is, what if it fails?" Cook said. "If confidence gets hurt even more, that could be devastating."

The debt crisis in Ireland put another damper on the market, threatening to sap Europe's recovery and European demand for U.S. exports. Until that issue is resolved, "I think the market is going to remain on pins and needles," said Anthony Chan, chief economist at J.P. Morgan Private Wealth Management.

Meanwhile, Chinese Premier Wen Jiabao said China's government is drafting measures to suppress inflation, according to Xinhua, China's official news agency. That has contributed to concern that China's growth will slow and its demand for raw materials will decline.

New U.S. indicators Tuesday did little to lift investors' spirits. The Fed reported that industrial production was unchanged in October and that the industry was using 74.8 percent of its capacity.

The Bureau of Labor Statistics said the Producer Price Index for finished goods rose 0.4 percent in October. Excluding food and energy, the index fell 0.6 percent.

© 2010 The Washington Post Company