U.S. stocks drop 5% after opening, but it could be worse
NEW YORK -- The Dow Jones industrial average came off its lows but was down 300 points to 8,370 in early trading, its lowest level in 5 1/2 years amid rising fear that the global economy is in for a deep recession.
U.S. stocks followed Asia and Europe lower.
Diving stock prices are being driven by emotion and fear in a bear market that just seems to get worse, says Andy Brooks, head trader at mutual fund giant T. Rowe Price.
"It is pretty serious," says Brooks. "Stocks around the globe are down 9%." Stocks fell 9.6% in Tokyo, 8.3% in Hong Kong and were down only slightly less in major European markets.
The key to the day, says Brooks, "is what stocks do after the open" on Friday.
The Dow, which was 550 points below Thursday's close in futures trading before the opening bell, seemed to be holding up fairly well, considering the steeps drops around the world.
Another bright spot is that both the Dow and the broader Standard & Poor's 500 index are still trading above their intra-day lows — 7773 for the Dow and 839.80 for the S&P — hit during the panic-led sell-off on Friday Oct. 10.
Much of the selling has been driven by global deleveraging, a process in which investors sell securities to reduce risk and lower their exposure to financial markets.
Investors are still unsure how far along in the deleveraging process we are. It is made worse because many big investors, such as hedge funds, were invested with borrowed money, which amplifies losses.
As is often the case when stocks drop precipitously, investors are hoping Friday's drop marks the final day of capitulation — a day when all the panicky investors who want to get out finally sell, and get out, says Brooks. That type of selling has paved the way for market bottoms and recoveries in past bear markets.
"The key to the day will be to see some real emotional selling," says Brooks. "Everyone wants the throw-in-the-kitchen-sink-type trading day. That would be healthy. There is some real panic and emotion and that often signifies a capitulation."
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