Stocks slide further on fear of global economic slump
NEW YORK -- Rising fear of a global economic slowdown prompted investors to hit the sell button Thursday and knock the Dow Jones industrial average down more than 400 points.
The Dow sank 3.8%, as investors digested the Federal Reserve's action Wednesday to sell $400 billion in short-term Treasuries while buying longer-term Treasuries for the same amount. The move is intended to lower longer-term interest rates.
But investors fretted over the wording of the Fed's statement, which indicated the U.S. economy still faces "significant" risks.
Investors are underwhelmed by the size of the Fed's "Operation Twist" maneuver and see it as too little to help stem "the economy, which is clearly staggering on the brink of a potential downturn," says Dan Seiver, professor of finance at San Diego State University.
Investors, too, have little faith that the Fed's latest move will be any more effective than its previous ones, says Michael Farr of Farr Miller & Washington. "It's clear we have a long and difficult process of recovery ahead, and any hopes of a V-shaped recovery should be put to rest," he says.
In addition, the fact that Europe has not made any solid progress in resolving its debt mess is only heightening concerns of a global economic slowdown, he says.
Investors are coming to the realization that one factor holding up stocks, expectations for solid corporate earnings growth for 2012, might be the latest to weaken, says Sam Turner of Riverfront Investment Group. He expects analysts to continue to cut their profit forecasts for 2012, which could cause stocks to fall another 5% before buyers are lured in, he says.
"Valuations have not quite discounted the fears of a recession. Whether we have one (a recession) or not, we'll price one in," he says.
Meanwhile Thursday, pain was felt by stocks across the board, but banks were especially hit hard. Bank of America tumbled 3.6%, or 23 cents, to $6.15 and Citigroup lost 4.7%, or $1.21, to $24.32. The SPDR Select Sector Financial exchange-traded fund, which fell more than 3%.
The prices of commodities such as oil and metals dropped steeply because investors worried that demand for them would fall if the world economy keeps slowing or falls into recession again.
Looking for a safe place to put their money, traders bought American government debt, which they see as much less risky than stocks. The yield on the 10-year Treasury note hit a record low 1.77%, down from 1.86% late Wednesday. Yields fall as investors buy bonds and send their prices higher.
Investors also fear that the Fed has maxed out its options for aiding economic growth.
"Counting on the Fed to get us out of this is a mistake," said Uri Landesman, president of New-York-based hedge fund Platinum Partners. The only thing that will fuel a recovery now, said Landesman, is if consumers and businesses spend more.
Asian stocks were hammered to start the world's trading Thursday. The Nikkei index in Japan fell 2.1%. The main stock averages fell 2.9% in South Korea, 2.6% in Australia and almost 5% in Hong Kong.
Europe fared even worse. The stock market fell 5.4% in France, 4.6% in Germany and almost 5% in Britain. Besides the economic headache, Europe is wrestling with how to tame a big debt problem.
The New York Stock Exchange invoked Rule 48, which limits how much information is released about stock trades. It is only used on days when extreme volatility is expected in the stock market.
The price of gold fell more than 4%. Earlier this summer, gold set one record high after another. Investors wanted it both as a safe place for their money and to cash in on what seemed an unstoppable run.
