Stocks Drop in Global Pullback; U.S. Economy Is Still Sputtering

Second-quarter earnings at Lowe's fell 19 percent, feeding doubts about consumers' ability and willingness to lead the U.S. economy out of recession.
Second-quarter earnings at Lowe's fell 19 percent, feeding doubts about consumers' ability and willingness to lead the U.S. economy out of recession. (By Mark Lennihan -- Associated Press)
Washington Post Staff Writers
Tuesday, August 18, 2009

U.S. stocks plunged Monday as investors became caught up in a global sell-off that undermined recent glimmers of economic hope and left investors and traders wondering whether the summer rally had run out of steam.

The Dow Jones industrial average dropped 186.06 points, or 2 percent, to 9135.34, erasing its August gains. It was the blue chips' biggest one-day drop since July 2. The broader Standard & Poor's 500-stock index fell 24.36 points, or 2.4 percent, to 979.73, while the tech-heavy Nasdaq composite index closed down 54.68 points, or 2.8 percent, at 1930.84.

All three indicators have risen at least 40 percent, with the Nasdaq leading the way, since hitting their early March bottoms. Investors had been expecting a pullback -- especially considering the underlying weakness of an economy still in recession.

"Whether it's the facts catching up with the expectations or the expectations catching up with the facts, I'm not sure which," said Bill Stone, chief investment strategist for PNC Wealth Management.

Investors shrugged off the one bright spot of news Monday -- an industry survey showed that home builders have grown more confident as signs point to a stabilizing housing market. The National Association of Home Builders said its housing market index inched up one point in early August, to 18.

The index has been rising steadily for five months but is still far from reaching 50, which indicates a normal market. It hasn't been at that level since April 2006, said David Crowe, chief economist for the home builders association. "It's still very, very low, and the pickup this month was largely due to expectations," he said.

There is also concern that many of the home sales are being driven by the $8,000 tax credit for first-time home buyers, which expires at the end of November, Crowe said. "How much of this buoyancy is due to that credit, and how much of it is the beginnings of a full recovery?" he asked.

Consumers, meanwhile, remain hunkered down. Their thrifty ways are weighing on retailers and markets.

Home improvement giant Lowe's has seen indications that the housing market and the economy are bottoming out, but the company's earnings continue to decline. Second-quarter profit dropped 19 percent compared with the same period last year, news that sent the company's stock plummeting more than 10 percent Monday.

Rival Home Depot and discount retailer Target are slated to report earnings Tuesday, which should provide further insight into shoppers' mindset.

The latest stock market run-up lasted four weeks before stalling on dismal retail sales data and an unexpected drop in consumer confidence. The economy is still shedding jobs, according to government data, and the number of people filing for unemployment benefits for the first time last week rose to 558,000.

The dour mood spread to Asia on Monday, with some of the continent's major markets down 3 percent or more. Japan's Nikkei 225 fell 3.1 percent despite the country's announcement Monday that its economy grew during the most recent quarter, ending Japan's longest recession since World War II. Hong Kong's Hang Seng Index fell 3.6 percent.

Europe caught the bug next. London's FTSE 100 dropped 1.5 percent, while Germany's Dax was down 2 percent.

U.S. investors were stuck in a game of follow-the-leader on Monday, with everyone trying to cash in on the markets' recent run-up before it fades, said Peter Cardillo, chief market economist with Avalon Partners in New York. In addition, he said, light trading made the day's fluctuations look even more exaggerated.

"The excuse to take some profits off the table after a strong summer rally is really what's behind this decline," he said.

The declines Monday were broad-based, with the energy and transportation sectors falling about 3.3 percent each and financial stocks down 3.5 percent. Commodity-producing companies took the biggest hit, down 4 percent, as futures fell on goods such as gold and soybeans.

Investors will be watching for Commerce Department data on new-home construction, due out on Tuesday. The National Association of Realtors is scheduled to publish numbers on existing-home sales on Friday. Both are expected to show improvement in the housing market even as analysts widely expect home prices to continue to fall through next year.

"The [builders] index is still at a very low level, but its increase suggests that we will continue to see gains in new-home sales," Abiel Reinhart of J.P. Morgan Chase said in a research note.

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