Stocks Closed Lower on Downbeat Economic News

Aug. 18, 2011— -- The Dow Jones industrial average closed 424.7 points lower to 10,985.50 on Thursday due to worries over a global economic slowdown.

In Europe, the major indexes at closing had fallen sharply, with London's FTSE off 4.5 percent and the German DAX down 5.8 percent.

While the Dow fell 3.72 percent, the S&P 500 fell 3.96 percent to 1,146.7 at the close.

Back in the U.S., the Labor Department reported 408,000 initial unemployment claims were filed in the week that ended Aug. 13, up 9,000 from a revised 399,000 from the previous week.

Doug Roberts, chief investment strategist of ChannelCapitalResearch.com, said that because the weekly claim figure is now above the key 400,000 level, it damages investors' confidence in the economic recovery. Adding to the concerns are federal spending cuts, which seem to rule out further fiscal stimulus.

The Federal Reserve of Philadelphia reported a decrease in factory activity in August. Roberts said all eyes will be on the Federal Reserve annual global central banking conference later this month in Jackson Hole, Wyo., for signs of any monetary stimulus.

The Consumer Price Index rose 0.5 percent in July, more than twice the expected 0.2 percent, leading to some fears of "stagflation," a combination of price inflation and stagnation in the economy.

Before these negative U.S. economic reports, bank stocks in the U.S. and in Europe were hit by a wave of selling after Sweden's financial regulator said lenders there should expect a worsening in Europe's debt crisis. That could lead to a freeze of lending between banks, cutting off loans to businesses.

Roberts said American investors are showing concerns the problems European banks face may not be contained to that continent. Investors are watching how Europe is managing its debt crisis, which has already led to bailouts for Greece, Ireland and Portugal.

Meanwhile, investment bank Morgan Stanley cut its global growth forecast for the year to 3.9 percent, down from a previous forecast of 4.2 percent. The bank cited an "insufficient" policy response to Europe's sovereign debt woes and the possibility of fiscal tightening that could make it harder for businesses to borrow.

Morgan Stanley, which also cut its China growth forecast for next year, wrote that the U.S. and Europe are "dangerously close to recession."

"Recent policy errors, especially Europe's slow and insufficient response to the sovereign crisis and the drama around lifting the U.S. debt ceiling, have weighed down on financial markets and eroded business and consumer confidence," London-based analyst Joachim Fels wrote in the report.

Roberts said Morgan Stanley's report confirmed what many investors already expected.

"Everyone is starting to think the economy is starting to fall apart and asking, 'who is going to bail us out?'" Roberts said. He said investors looking for safe havens in Treasury bonds and gold have led to a decrease in Treasury yields and a spike in gold.

The price of gold hit a record high, at $1,829.70 per ounce on Thursday. Gold prices have more than doubled since the recession began in the winter of 2007, and are up about 19 percent since the beginning of June, according to the Associated Press.

In other global economic news, Japanese finance minister also said July exports fell 3.3 percent from the previous year to 5.78 trillion yen ($75.6 billion) as a result of the strong yen and ongoing impact from the March 11 earthquake and tsunami.

In Britain, retail sales rose by only 0.2 percent in July from the month before, below market expectations for a 0.4 percent rise and another sign the British economic recovery is slowing.

The Associated Press contributed to this report.