Stocks tumbled again Tuesday, despite efforts by the Federal Reserve to keep credit flowing to businesses and word from Fed Chairman Ben Bernanke that the central bank could soon cut interest rates to re-energize the economy.
The Dow Jones industrial average, down nearly 370 points Monday, sank another 508 points, or 5.1%, to 9447. It was the Dow's fifth-consecutive drop, during which its slid more than 1,400 points, or 13%. The Standard & Poor's 500 tumbled 61 points, or 5.7%, to 996. It was the first time the S&P 500 — the index to which trillions of dollars of investors' money is linked — had closed below 1000 since Sept. 30, 2003. The S&P 500 has now fallen 36.3% from its October 2007 high, outstripping the average 31.5% decline in the typical post-World War II bear market.
Stock market losses continued to accelerate after passage of Friday's $700 billion rescue plan for the financial industry, which was supposed to restore investor confidence. Tuesday, investors bailed even after the Fed made one of its most dramatic moves yet to help corporations through the global credit crunch. The Fed said it would buy corporate commercial paper — a way to lend short-term cash directly to creditworthy companies that need funds for payroll and other immediate needs.
Money market and mutual funds are the biggest buyers of commercial paper. The Fed said the market for short-term loans fell $52.1 billion to $1.8 trillion the week ended Sept. 17.
The Fed's Commercial Paper Funding Facility can buy up to $1.3 trillion in three-month corporate IOUs until April 30, 2009. The program is expected to lead to much lower interest rates and more credit availability — although details, including when the Fed will start buying, are still being worked out.
Bernanke noted credit has tightened even for the worthiest business and consumer borrowers. That was underscored by a report Tuesday from the Fed that showed consumer borrowing fell in August for the first time since January 1998, reflecting both a tight credit market and a spending slowdown. Borrowing fell for both revolving loans, which include credit cards, and non-revolving, which includes borrowing to buy big-ticket items.
"People don't want to borrow if they can help it. People can't borrow even if they want to," says David MacEwen, chief investment strategist of fixed income at American Century Investments. Credit markets across the board remain "seized up," he says, and the market for debt sold by companies is "completely illiquid." When companies are able to borrow, the terms are very onerous, he says. "If Corporate America cannot finance itself from credit markets, we're in for a world of hurt," he says.
In what could be one slightly positive sign, investors sold short-term government Treasuries, which have been a favorite spot to hide. Investors sold three-month Treasury bills, pushing the yield up to 0.70% from 0.45%.
The Fed is positioned as a backup player, not a source of cheap money, and its program may become critical to companies near the end of the year when the commercial paper market is typically tighter.
"We may use this as a fallback," says Helen Shan, treasurer of Pitney Bowes, a document-management services company. "But right now, I'm not sure it makes much sense for us."
The Fed's move and Bernanke's comments failed to have a positive impact on Wall Street.