Dow tumbles 504 as Wall Street shakeup rattles investors
— -- The stock market suffered its worst rout in seven years Monday amid growing fears that the credit crunch is entering a more dangerous phase.
With a growing number of U.S. investment banks, insurers and other financial institutions fighting for survival, some investors are coming to the conclusion that the entire system is at risk.
"The fear is that mortgage credit risk exists everywhere," says James Stack, president of InvesTech Research. "As a market historian who has been through the '87 crash and 2000 tech meltdown, I can't say I'm not concerned."
The pain was widespread:
•The Dow Jones industrials fell 504.48 points, or 4.4%, to 10,917.51. It was the sixth-largest point drop in history.
•The Standard & Poor's 500 index dropped 59.00 points, or 4.7%, to 1192.70, its first close below 1200 since Oct. 28, 2005. Financial stocks in the S&P 500 fell a record 10.3%.
•The sell-off obliterated more than $700 billion in shareholder wealth.
Market veteran Hugh Johnson of Johnson Illington Advisors called the market turbulence "historic." Investors were encouraged earlier in the day as the S&P 500 traded above its prior closing low for the year. But the selling pressure gained, and the index hit a fresh low for the year. It's now 23.8% off its all-time high.
The bulk of the selling centered around stocks in the insurance and diversified financial industries. AIG fell 61% and Lehman fell $3.44, or 94%, to 21 cents.
Selling was exacerbated by so-called short-sellers, who bet that stocks will fall further, says Todd Leone, a trader at Cowen. A short-seller profits by selling borrowed shares and buying them back at lower prices. "It seems like everyone is saying who is next to fail," Leone says.
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